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Handling  a  Brokerag,e 
Account 


By 
ROBERT  L.  SMITLEY,  A.B. 


Financial  and  Business  Research  Specialist.     Member  of  New  York 

Stock  Exchange,  1907—1910.    Formerly  Cashier,  Shearson,  Hammill 

&  Co.  and  Business  Manager,  Magazine  of  Wall  Street. 


AMERICAN  INSTITUTE  OF  FINANCE 


Handling  a  Brokerage 
Account 

By 

ROBERT  L.  SMITLEY,  A.B. 


Financial  and  Business  Research  Specialist.     Member  of  New  York 

Stock  Exchange,  1907 — 1910.    Formerly  Cashier,  Shearson,  Hammill 

&  Co.  and  Business  Manager,  Magazine  of  Wall  Street. 


AMERICAN  INSTITUTE  OF  FINANCE 
BOSTON 


A 
"COMPLETE  EDUCATIONAL  COURSE" 
IN  THE  SCIENCE  OF 
MAKING  MONEY  MAKE  MORE  MONEY 

This  list  is  arranged  in  the  order  of  proper  reading.  The 
books  are  accompanied  by  a  series  of  test  questions,  key  prob- 
lems and  analyses  outlines,  enabling  the  student  to  apply  the 
knowledge  acquired  to  immediate  stock  market  and  investment 
conditions. 

1.  Developing  Financial  Skill      IL  Investment  Securities 

2.  Forces  Which  Make  Prices      12.  Business  Cycles 

3.  Manipulation  and  Market      ^^-  Measuring   and    Forecasting 

Leadership  General   Business    Condi- 

tions 

4.  Handling  a  Brokerage  Ac-  _,_,., 

,  14.  The  Technical  Position  of  the 

count  ,,    , 

Market 

5.  Market  Information  _  ,         ■,■ 

1:^.  Money  and  Credit 

6.  The  Essential  Features  of 

o        •,  •  16.  Business  Profits 

Securities  •' 

T    T-;      ^r  1        jr        n    j      j      17.  Launching  a  New  Enterprise 
1 .  1  he   Value  oj  a  Railroad  ^  ^ 

Security.  18.  Securing   Capital  for  Estab- 

.  .  lished  Enterprise 

8.  Industrial  Securities 

19  Internal    Financial    Manage- 

9.  Oil  Securities  ment 

10.  Mining  Securities.  20.  Search  for  Bargains 


Copyright,  1922,  by 
American  Institute  of  Finance 


TABLE  OF  CONTENTS 

Chapter  I.     What  the  Broker's  Functions  Are  Pa^e 

^~i                How  the  Brokerage  Business  Originated 5 

-;-!,                An  Essential  Characteristic 5 

Service  Which  Broker  Affords  Customers 6 

^               Development  of  Brokerage  Service 7 

si               Sources  of  the  Broker's  Income 8 

^'^                Purchases  Made  on  Margin 8 

^               Why  Higher  Rates  are  Charged 9 

^                 Collection  of  Interest  and  Dividends 10 

f^      Chapter  II.     Organization  of  the  Broker's  office 

^               What  Each  Partner  Does 11 

<J^               Activities  of  the  Order  Department  Described 11 

^               Handling  of  Orders .  13 

Completing  the  Records  of  Orders 14 

Activities  of  the  Cashier's  Department 15 

Bookkeeping  Department         16 

Chapter  III.     What  Exchange  Membership  Means 

n^.^                Purposes  of  New  Stock  Exchange 17 

\s^                Essential  Characteristics 17 

V  Stock  Exchanges  Classified 18 

s     Chapter  IV.     Giving  Orders  and  Kinds  of  Orders 

y\               Time  During  Which  Orders  Remain  Good 19 

^              Kinds  of  Orders 19 

^               Stop  Orders 20 

N^               Special  Uses  of  Orders 20 

^               How  Orders  are  Given 21 

V  Special  Points  Concerning  Orders 22 

^              Handling  Orders  on  Exchange  Floor 23 

Commission  Rates 24 

■^ 
"^    Chapter  V.     Interest  Charges  and  Margins 

Call  and  Time  Money  Rates .  25 

VHow  Kind  of  Securities  Affect  Rates 25 

Determining  What  Rates  to  Charge 26 

Renewal  Rates  Charged  by  Banks 27 

Why  Brokerage  Charges  are  Reasonable 28 

What  are  the  Marginal  Requirements? 29 

Keeping  Good  the  Margin 30 

Typical  Illustrations 31 


\ 
^ 


447461 


4  Table   of   Coil  ten  ts 

Chapter  \'I.     The  Broker's  Statement  Pa^e 

Checking  Over  Our  Actual  Account 33 

Statement  No.  1 33 

A  Syndicate  Allotment 35 

A  Short  Sale 35 

Statement  No.  2 36 

Statement  No.  3 36 

Proving  the  Statement 38 

Keeping  Essential  Records 40 

Watching  Special  Points 40 

Chapter  VII.     Transfers  and  Deliveries 

Why  Stocks  Should  be  Transferred 42 

Additional  Suggestions 43 

Delay  in  Transfer 44 

Care  in  Signing  Proxies 44 

Lost  or  Stolen  Certificates 45 

Transfer  Tax 46 

General  Regulations  Covering  Transfer         47 

Chapter  VIII.     Legal  Relations  Between  Broker  and  Customer 

What  the  Legal  Relations  Are 51 

What  the  Broker  Undertakes  to  Do 51 

What  the  Customer  Undertakes  to  Do 52 

Laws  Bearing  upon  Margin  Calls 52 

Special  Agreements  Entered  Into 53 

Miscellaneous  Points 54 

Chapter  IX.     Selection  of  a  Broker 

Characteristics  of  Brokerage  Firms 55 

Individual  or  Professional  Standing 56 

Lax  Methods  a  Danger  Signal 57 

Chapter  X.     The  Customer's  Co-operation 

Essentials  of  Co-operation 58 

Complaints 58 

The  Business 59 

Market  Letters         59 

Brokerage  Advertising 60 

Conclusion 60 

Test  Questions 

Key  Problems 

Answers  to  Starred  Questions 


CHAPTER   I 

WHAT   THE   BROKER'S   FUNCTIONS   ARE     F] 

^  i 
"Transactions  involving  millions  come  and  go  through 

the  Stock  Exchange  without  the  slightest  friction.      No  great 

business  ynechanism  works  more  smoothly y 

— William  C.  Van  Antwerp, 

of  Van  Antwerp,  Bishop  &  Fish. 

How  the  Brokerage  Business  Originated 

As  we  understand  the  stock  broker  at  the  present  time,  his 
profession  dates  back  to  the  estabhshment  of  the  Bank  of 
England  in  1694.  From  that  period  until  the  present,  the  pro- 
fession has  gone  through  vicissitudes,  and  sometimes  the 
members  have  been  looked  down  upon  and  at  other  times  looked 
up  to. 

The  establishment  of  a  National  Debt,  and  the  opportunity 
for  individuals  to  purchase  and  sell  the  evidences  of  a  National 
Debt,  brought  about  the  idea  leading  to  what  is  known  today  in 
England  as  Joint  Stock  Companies  and  in  the  United  States  as 
Corporations. 

A  portion  of  the  interest  in  the  Joint  Stock  Companies  or 
the  Corporations  became  known  as  a  share. 

Individuals  appreciated  the  possibility  of  selling  their  shares 
to  others,  either  at  a  profit  or  because  they  needed  liquid  funds, 
and  the  necessity  for  the  broker  came  about  because  of  the  fact 
that  the  seller  and  buyer  could  not  easily  discover  each  other. 
It,  therefore,  became  the  part  of  the  stock  broker  to  act  as  an 
intermediary  between  the  parties,  i.  e.,  buyer  and  seller  — -  and  for 
this  service  he  was  entitled  to  charge  either,  or  both,  a  com- 
mission. 

An  Essential  Characteristic 

In  all  study  of  the  brokerage  business,  it  must  clearly  be 
kept  in  mind  that  the  stock  broker  has  nothing  to  sell  but  his 


6  Handling   a  Brokerage   Account 

service.  We  find  investment  houses  acting  as  stock  brokers, 
and  also  as  houses  of  issue.  In  other  words,  they  sometimes 
purchase  a  proportionate  share  of  a  corporation  with  their  own 
funds  and  resell  this  share  to  others  at  a  profit.  This  is  not  the 
principle  of  the  broker.  The  brokerage  business,  as  a  business, 
is  purely  to  act  as  an  intermediary  between  buyer  and  seller,  to 
be  essentially  an  agent  for  one  or  the  other,  and  not  to  own  any 
portion  of  the  property  which  is  either  bought  or  sold. 

In  England  and  in  France,  the  broker  is  not  permitted  to 
speculate  on  his  own  account  if  his  business  is  to  transact  pur- 
chases and  sales  for  clients.  In  this  country  the  broker  is  per- 
mitted to  assume  not  only  the  functions  of  the  broker,  but  he 
may  also  be  investment  banker,  banker,  or  a  speculator  on  his 
own  account. 

Service  Which  Broker  Affords  Customers 

The  essential  duty  of  the  stock  broker,  we  have  noted, 
consists  in  acting  as  an  intermediary  or  agent  between  the  buyer 
and  the  seller  of  securities  (securities  being  defined  as  stocks, 
bonds,  or  other  forms  of  corporate  ownership  or  credit,  which  are 
part  of  corporate  enterprise).  He  may  either  find  a  buyer  for 
his  seller,  who  is  a  principal,  or  he  may  find  a  buyer  who  is  an 
agent  for  a  principal,  in  which  case  the  broker  deals  with  another 
broker.  Therefore,  the  greater  part  of  the  transactions  of  the 
broker  are  with  the  principal  on  one  side  and  another  broker  on 
the  other  side. 

It  will  easily  be  seen  that  the  necessity  for  the  broker  is  such 
that,  without  his  co-operation  in  the  financial  world,  there  would 
be  no  stability  for  prices,  and  tremendous  leeway  for  the  swindler, 
who  might  desire  to  defraud  his  client. 

The  fraternity  of  brokers,  by  creating  a  market  whereby 
purchases  and  sales  in  corporate  enterprise  can  be  made,  has 
been  a  constructive  influence  in  the  tremendous  industrial 
growth  of  the  past  twenty-five  years.  The  fraternity  of  brokers 
between  1835  and  1870  was  largely  responsible  for  the  railway 
and  canal  organization  in  the  United  States,  for  without  them  it 
is  doubtful  if  these  arteries  of  industry  could  have  been  satisfac- 


What   the  Broker's  Functions   Are       7 

torily  built.  Previous  to  1835  the  fraternity  of  brokers  was 
instrumental  to  a  marked  degree  in  the  stabilizing  of  our  shipping 
and  banking  industry  as  well  as  the  building  up  of  our  various 
insurance  companies. 

Development  of  Brokerage  Service 

The  evolution  of  the  stock  broker  as  a  professional  man,  has 
been  extremely  slow;  but  it  has  been  part  of  the  economic  history 
that  all  jobbers  or  intermediaries  have  been  looked  down  upon 
as  parasites  rather  than  producers,  and  brokers  have  frequently 
suffered  from  these  shallow  views.  It  is  not  necessary  to  delve 
deep  into  this  evolution  other  than  to  keep  it  in  mind  in  studying 
the  stock  brokerage  business  as  it  is  conducted  at  the  present 
time. 

Inasmuch  as  the  stock  broker  has  nothing  to  sell  but  service, 
it  is  not  an  economic  duty  for  him  to  guarantee  that  which  he 
buys  and  sells.  The  broker,  however,  has  overstepped  these 
economic  bounds  to  a  certain  degree,  inasmuch  as  through  the 
instrumentality  of  the  Stock  Exchanges  of  which  he  is  a  member, 
there  is  a  certain  insurance  for  the  client. 

This  insurance  comes  about  through  what  is  known  as  the 
listing  of  securities.  Before  a  corporation  can  have  its  securities 
traded  in  on  an  Exchange,  there  are  certain  requirements  which 
must  be  met.  These  requirements  consist,  in  the  main,  of  a 
certain  formulated  statement  of  the  company's  financial  and 
managerial  affairs.  If  such  a  statement  appears  to  be  satis- 
factory, from  the  viewpoint  of  integrity,  the  stock  is  listed,  i.e., 
it  is  given  its  place  on  the  quotation  list  of  the  Stock  Exchange. 

But  the  broker  must,  for  the  sake  of  his  clients,  deal  in  many 
securities  which  are  not  listed  on  the  Exchanges,  and  it  is  not  his 
place,  and  the  clients  must  not  expect  him,  to  give  any  certifi- 
cation as  to  the  worthiness  of  such  so-called  outside  securities. 

The  development  along  service  lines  has  reached  a  point 
considerably  beyond  the  listing  of  securities  on  the  Exchange, 
for  the  broker  is  called  upon  by  his  clients  to  give  unbiased 
opinion  regarding  investments  or  speculations.  To  give  an 
unbiased  opinion,  it  is  necessary  for  the  broker  either  through 


8  Ha?idling   a  Brokerage   Account 

his  own  research  and  inherent  knowledge  or  through  a  special 
department  conducted  by  experts,  to  disseminate  such  advice 
and  such  knowledge  as  he  may  be  able  to  obtain  regarding  these 
various  securities.  This  necessitates  very  commonly  the  building 
up  of  a  Statistical  and  Financial  Library.  It  further  necessitates 
an  equipment  consisting  of  current  reports  and  data  derived  from 
services  which  have  been  established  for  this  purpose.  In  a 
business  such  as  this  is,  there  is  likely  to  be  a  great  amount  of 
collated  material,  which  must  be  thoroughly  investigated,  and 
the  wheat  separated  from  the  chaff. 

Sources  of  the  Broker's  Income 

The  broker  may,  for  example,  enter  into  business  with  a 
membership  on  the  New  York  Stock  Exchange,  costing  him 
$100,000,  and  capital,  perhaps,  of  $500,000. 

There  are  two  sources  of  income  for  the  broker  through  which 
he  must  make  his  earnings,  and  utilize  his  capital.  These 
sources  are  commissions  and  interest. 

The  commission  is  charged  by  the  broker  for  bringing  the 
parties  together  and  making  the  actual  sale;  and  if  every  cus- 
tomer paid  in  full  for  that  which  he  purchased  and  turned  over 
at  the  time  the  securities  which  he  sold,  there  would  be  little 
need  for  additional  capital  on  the  part  of  the  broker  other  than 
the  cost  of  his  membership  on  the  Exchange.  It  thus  comes 
about  that  the  commissions  which  a  broker  charges  should  be 
properly  applied  as  earnings  on  the  capital  which  he  has  invested 
in  his  membership  on  the  Exchange. 

Purchases  Made  on  Margin 

The  interest  part  of  the  earning  capacity  of  the  broker  arises 
through  what  is  known  as  the  marginal  accounts. 

Margin  is  that  part  of  a  transaction  which  the  client  of  the 
broker  really  owns.  Margin  is  a  term  which  could  be  used  in 
every  form  of  business.  If  a  man  owns  a  $10,000  house  and  has 
a  $5,000  mortgage  on  the  house,  his  margin  in  the  house  is  $5,000. 
If  a  merchant  has  a  stock  of  $10,000  worth  of  silk  and  has  bor- 


What   the  Broker's  Functions   Are       9 

rowed  from  his  bank  $8,000,  his  margin  amounts  to  $2,000.  The 
use  of  the  marginal  transaction  in  any  business  is  to  promote  the 
enlargement  of  the  business  and  to  permit  the  individual  to  deal 
in  more  than  he  can  actually  finance  with  his  own  funds. 

If  a  man  has  $10,000  and  desires  to  pay  for  what  he  purchases, 
and  that  which  he  purchases  costs  $100  a  share,  he  is  able  to  buy 
one  hundred  shares,  but  if  a  man  has  $10,000  and  goes  to  a 
broker,  he  may  be  able  to  buy  $100,000  worth  of  the  same  security 
or  one  thousand  shares  by  utilizing  the  marginal  principle. 

Suppose  that  a  man  has  $100,000  and  intends  to  buy  ten 
times  as  much  as  that  represented  by  his  $100,000.  He  will  go 
to  his  broker,  whom  we  have  mentioned  above  as  ha\dng  a 
capital  of  $500,000  and  instruct  his  broker  to  buy  $1,000,000 
worth  of  the  stock  which  he  desires.  He  gives  the  broker  his 
$100,000.  The  broker  utilizes  his  $500,000  of  capital,  but  there 
is  $1,000,000  worth  of  corporate  wealth  purchased. 

What  then  occurs? 

Why  Higher  Rates  are  Charged 

The  broker  goes  to  his  bank,  or  he  goes  to  the  Money  Post  on 
the  New  York  Stock  Exchange,  where  various  banks  lend  their 
funds,  and  he  borrows  $400,000  at  5  per  cent  —  for  example  — 
and  deposits  $500,000  worth  of  corporate  shares  as  collateral  for 
the  protection  of  the  $400,000  which  he  has  borrowed. 

The  broker's  capital  of  $500,000  is  worth  at  least  5  per  cent 
under  normal  conditions.  He  is  forced  to  pay  5  per  cent,  let  us 
assume,  for  the  use  of  the  money  which  he  has  borrowed  from 
his  bank,  amounting  to  $400,000,  so  that  his  client's  enterprise 
costs  him  5  per  cent  on  $900,000. 

The  broker  must  maintain  a  clerical  office,  must  buy  books 
of  account,  must  issue  statements  of  record,  must  conform  to 
many  legal  requirements,  and  must  pay  rent  and  other  overhead 
charges,  simply  because  his  client  desires  to  purchase  ten  times 
the  amount  of  corporate  securities  that  the  client's  capital  would 
permit,  if  purchased  outright.  Therefore,  this  additional 
service  on  the  part  of  the  broker  is  entitled  to  a  material  recom- 
pense from  the  client,  and  the  broker  is  entitled  to  charge  and 


10         Handling   a  Brokerage   Account 

does  charge  the  chent  a  higher  rate  of  interest  than  that  which 
he  pays.  Thus,  we  find  the  second  series  of  profits  for  the 
broker. 

Collection  of  Interest  and  Dividends 

Corporate  indebtedness,  if  in  the  form  of  bonds,  pays  interest 
and  the  brokerage  profession  collects,  in  many  instances,  the 
bond  interest  for  the  clients. 

Corporate  partnership,  in  the  form  of  stock,  pays  dividends, 
issues  rights  and  other  kinds  of  privileges,  and  inasmuch  as  the 
broker  must  necessarily  keep  these  evidences  of  corporate  enter- 
prise in  a  negotiable  form  for  the  sake  of  making  such  instru- 
ments capable  of  having  a  borrowing  capacity,  it  becomes  neces- 
sary for  the  broker  to  arrange  for  the  collection  and  the  distri- 
bution of  these  dividends  and  other  accrued  increments  arising 
from  the  distribution  of  corporate  profits.  This  collection  and 
division  of  dividends,  etc.,  necessitates  additional  machinery  of 
a  costly  nature,  and  it  is  necessary  for  the  broker  to  derive  some 
profit  from  this  portion  of  the  service  which  he  renders  his  client. 


CHAPTER   II 
ORGANIZATION   OF   THE    BROKER'S   OFFICE 

What  Each  Partner  Does 

The  client  has  presented  for  his  examination  on  the  next 
page  a  comprehensive  chart  of  the  organization  of  a  broker- 
age office.  This  organization  is  not  similar  to  any  other 
organization  in  the  financial  field,  such  as  investment  banking, 
banking,  foreign  exchange  or  the  collateral  branches  of  corporate 
enterprise.  The  ideal  brokerage  firm,  without  taking  into 
consideration  branch  office  functions,  may  be  said  to  contain 
three  partners.  One  partner  has  charge  of  the  actual  buying 
and  selling  on  the  Exchange  or  in  the  open  market.  The  second 
partner  has  charge  of  getting  new  clients  or  developing  in  a 
profitable  manner  for  the  client  and  the  firm  such  clients  as 
already  exist,  and  in  collating  news  and  information  which  is 
necessary  for  a  high  type  of  brokerage  service.  The  third 
partner  has  charge  of  the  mechanical  end  of  the  business,  relating 
to  the  office  and  the  overhead.  And  it  is  with  this  third  partner 
that  we  have  now  to  deal  in  determining  how  the  office  is  organ- 
ized properly  to  care  for  the  business  of  the  client. 

Of  course,  the  duties  of  these  three  partners  are  interrelated, 
but  so  far  as  is  possible,  the  actual  machinery  —  and  it  is  an 
extensive  machinery  —  is  in  charge  of  this  third  partner. 

First  and  foremost,  he  has  associated  with  him  an  office 
manager,  whose  business  it  is  to  take  entire  charge  of  the  details 
of  the  establishment. 

Activities  of  the  Order  Department  Described 

The  first  section  of  the  machinery  is  the  Order  Department. 
The  relation  between  the  client  and  the  broker  in  the  matter  of 


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Organization    of  the  Broker's   Off  ice  13 

giving  orders,  and  the  ethics  in  connection  with  this  phase  of 
the  business,  will  be  taken  up  in  Chapter  IV.  Here  we  are 
concerned  with  the  way  the  various  activities  are  carried  on. 

The  Order  Department  machinery  usually  consists  of  tele- 
phones and  telegraph  instruments.  Where  the  brokerage  firm 
provides  a  room  for  the  customers,  it  is  usually  the  case  that  the 
Order  Department  is  quite  close  to  this  room,  with  an  employe 
stationed  at  a  window  or  an  opening  to  facilitate  the  quick  hand- 
ing in  of  orders  for  transmission  to  the  Exchange,  or  to  the  out- 
side broker  dealing  in  securities  not  listed  on  the  Exchange. 
The  chief  of  the  Order  Department  is  a  man  preferably  who  is 
quick,  cool,  and  who  never  loses  his  head. 

This  department  provides  blanks  marked  "buy"  or  "sell" 
whereon  the  customer  writes  the  order,  or  if  the  order  is  received 
over  the  telephone,  it  is  written  on  one  of  these  slips  by  the 
telephone  clerk,  or  if  received  over  the  telegraph  wire,  it  is  written 
by  the  operator.  There  is  one  other  form  necessary,  known  as 
the  "Cancellation"  form,  on  which  form  is  written  either  the 
cancellation  of  an  order  already  given  or  such  cancellation  with 
a  change  in  price  added  to  it.  These  orders  as  soon  as  handed 
in,  are  given  to  the  clerk,  who  is  stationed  at  a  telephone  with  a 
direct  connection  to  the  floor  of  the  Stock  Exchange.  There 
may  be  more  than  one  telephone  to  the  floor  of  the  Exchange, 
so  that  one  hundred  shares  or  larger  orders  may  be  carried  over 
it  only,  and  odd  lots,  or  less  than  one  hundred  shares,  may  be 
transmitted  over  another  'phone. 

A  third  telephone  brings  the  operator  into  direct  connection 
with  the  representative  of  the  firm  who  buys  and  sells  for  the 
client  shares  on  the  Curb  Market,  or  also  in  what  is  known  as 
the  Unlisted  Market. 


Handling  of  Orders 

As  soon  as  a  customer's  orders  are  transmitted,  they  are 
repeated  back  by  the  clerk  at  the  other  end,  and  immediately 
checked  by  the  first  telephone  clerk  and  then  handed  to  another 
employe  who  lists  them  in  a  book  retained  for   that   purpose. 


14         Handling   a  Brokerage   A  c  c  ou7it 

with  the  date  and  time  at  which  the  order  was  received,  the 
name  of  the  client  giving  the  order,  the  account,  if  possible,  and, 
of  course,  the  price,  should  this  be  specified  by  the  customer. 

When  the  order  has  been  filled,  the  telephone  operator 
receives  word  from  the  broker  to  that  effect.  It  is  at  once 
written  down  and  passed  to  the  Head  Order  Clerk,  who  either 
makes  a  memorandum  report  to  the  client  or  lists  it  on  triplicate 
forms  to  be  sent  to  the  Accounting,  Clearing  House,  and  Report 
Departments. 

It  is  often  the  case  on  account  of  the  volume  of  its  transactions 
that  firms  find  it  necessary  to  use  two  telephones  for  the  trans- 
mission of  orders,  and  another  telephone  for  the  receipt  of 
completed  transactions. 

Furthermore,  during  the  entire  period  in  which  the  market 
is  open  for  business,  it  is  necessary  for  the  broker  to  quote  prices 
on  various  securities  in  which  his  customer  is  interested,  and  this 
involves  considerable  machinery,  necessitating  much  time,  and 
the  keeping  of  numerous  records. 

Completing  the  Records  of  Orders 

When  the  triplicate  reports  leave  the  Order  Department,  one 
goes  immediately  to  the  Clearing  House  Department,  where  the 
clerical  force  prepares  the  machinery  and  the  forms  necessary 
for  immediate  comparison  with  the  broker  with  whom  the 
transaction  was  made.  This  department  also  has  entire  charge 
of  making  out  and  exchanging  Clearing  House  and  comparison 
tickets,  and  making  up  what  is  known  as  the  Clearing  House 
Sheet.  On  this  sheet  are  listed  and  arranged  all  the  transactions 
in  securities  which  are  actively  dealt  in,  and  which  the  Clearing 
House  of  the  New  York  Stock  Exchange  may  assist  its  members 
in  clearing.  Certain  stocks,  bonds,  etc.,  which  are  not  cleared 
are  entered  on  another  form,  which  is  known  as  the  "Ex-Clearing 
House  Blotter."  These  so-called  Ex-Clearing  House  transac- 
tions must  be  settled  individually  the  following  day,  unless 
otherwise  specified. 

Another  form  from  the  Order  Department  goes  to  the  Report 


Organization   of  the  Broker's   Off  ice  15 

Clerk,  who  types  a  memorandum  which  is  required  by  law  to  be 
sent  immediately  to  the  client,  designating  from  whom  the 
stock  was  purchased  or  to  whom  sold,  the  price,  the  date  and 
time,  and  possibly  certain  features  of  accounting  whi^h  would; 
interest  and  be  helpful  to  the  client. 

The  third  form  goes  direct  to  the  Margin  Clerk,  who  immedi- 
ately discovers  from  his  records  whether  or  not  the  client  is. 
entitled  to  the  credit  which  the  firm  has  extended  in  making  the 
purchase.  If  the  margin  is  exhausted  or  already  below  that 
which  is  required  by  the  broker,  it  is  necessary  for  the  Margin 
Clerk  to  send  out  a  call  to  the  client,  asking  for  more  funds.  As 
soon  as  this  matter  has  had  the  Margin  Clerk's  attention,  the 
report  is  turned  over  to  bookkeepers,  who  hold  the  so-called 
daily  blotters  or  sheets  of  record  from  the  Clearing  House  De- 
partment; and  they  check  the  transaction  against  the  figures 
which  have  appeared  on  these  blotter  sheets,  and  then  post  in 
the  proper  ledgers. 

The  following  morning  these  Ex-Clearing  House  sheets,  with 
a  summary  of  the  Clearing  House  sheets  attached  are  delivered 
to  the  Cashier's  Department. 


Activities  of  the  Cashier's  Department 

The  multiplicity  of  detail  of  the  Cashier's  Department  would 
perforce  necessitate  an  entire  treatise  upon  the  subject,  were 
they  to  be  described  in  full,  but  the  Cashier's  duties  in  brief  may 
be  stated  as  follows: 

Upon  receiving  the  business  of  the  previous  day,  comprising 
Clearing  projects  (in  many  instances  odd  lots  or  amounts  less 
than  one  hundred  shares  are  cleared)  the  Cashier  notes  whether 
or  not  the  necessary  payments  are  greater  than  apparent  receipts. 
If  he  finds  that  the  payments  for  the  day  will  be  greater  than  the 
receipts,  he  borrows  sufficient  funds  through  the  help  of  his 
Stock  Exchange  member  on  the  Stock  Exchange,  or  directly 
from  his  bank;  and  uses  the  securities  which  have  been  purchased, 
or  which  he  may  have  in  his  vault,  to  make  up  the  collateral  for 
the  loans.     When  the  funds  from  the  loans  have  been  received, 


16         Handling   a   Brokerage   Account 

they  are  deposited  in  his  bank  or  banks  to  his  credit,  and  drawn 
against  to  make  payments  for  that  which  he  must  receive  from 
the  transactions  through  purchases  on  the  previous  day. 

The  Cashier's  Department  must  keep  accurate  record  of  the 
securities  which  are  received  and  be  satisfied  that  such  securities 
are  properly  endorsed  and  fulfil  all  the  features  which  are  pre- 
scribed by  the  rules  of  the  Stock  Exchange  or  customer;  he  must 
be  sure  that  his  securities  are  properly  transferred  to  his  own  or 
his  client's  name  so  as  to  receive  whatever  dividends  are  distrib- 
uted by  the  company;  he  must  keep  a  record  of  the  collateral 
securities  in  his  loans;  he  must,  upon  order,  transfer  securities 
to  such  names  as  are  given  him  by  clients;  and  among  the 
thousand  and  one  other  incidental  duties  of  his  department, 
must  arrange  for  the  substitution  of  certain  securities  which  he 
possesses  in  his  own  vault  for  securities  which  are  placed  in  loans 
in  his  banks,  and  which  may  be  needed  for  delivery.  Inciden- 
tally, he  keeps  accurate  record  of  his  bank  balances,  draws  checks, 
makes  deposits,  and  keeps  a  record  of  the  securities  which  come 
in  and  go  out,  knowing  at  all  times  where  they  are;  and  his  books 
must  balance  both  as  to  money  and  securities  every  night  before 
he  goes  home,  or  before  the  next  day's  business  is  started. 

Bookkeeping  Department 

The  Bookkeeping  Department  in  addition  to  keeping  a 
careful  and  up-to-the-minute  record  of  the  condition  of  every 
client's  account,  must  render  periodical  statements  to  the  clients, 
and  make  certain  that  the  capital  of  the  firm  is  intact  and  that 
the  multifarious  duties  connected  with  that  part  of  the  organiza- 
tion are  accurate. 

The  brokerage  business,  it  will  be  noted  from  the  foregoing 
description,  possesses  a  somewhat  elaborate  and  complex  organ- 
ization. The  work  which  is  done  must  be  done  with  speed  and 
with  accuracy,  quite  unlike  the  ordinary  merchandise  business 
where  certain  features  may  be  postponed  from  day  to  day. 


CHAPTER   III 
WHAT   EXCHANGE   MEMBERSHIP   MEANS 

Purposes  of  New  York  Stock  Exchange 

There  are,  throughout  the  United  States,  Stock  Exchanges  in 
nearly  every  large  city,  but  in  almost  all  cases  the  Exchanges  in 
these  cities  deal  only  with  local  securities.  For  the  purpose  of 
explaining  what  Exchange  membership  means,  it  is  necessary 
and  proper  to  take  the  New  York  Stock  Exchange  as  an  illustra- 
tion. 

The  object  of  the  Stock  Exchange  is  to  furnish  facilities  for 
the  convenient  transaction  of  business  by  its  members  as  brokers, 
to  maintain  high  standards  of  commercial  honor  and  integrity 
among  its  members,  and  to  provide  and  inculcate  just  and 
equitable  principles  of  trade  and  business.  To  become  a  member 
of  the  New  York  Stock  Exchange  necessitates  the  most  searching 
investigation  on  the  part  of  the  Committee  on  Admissions, 
regarding  the  integrity  and  the  financial  responsibility  of  the 
applicant.  There  is  no  foreign  Stock  Exchange,  with  the  excep- 
tion of  the  Paris  Bourse,  which  approximates  the  strictness  of 
the  membership  test  required  by  the  New  York  Stock  Exchange. 
The  Paris  Bourse,  however,  is  hardly  analogous  because  of  the 
fact  that  the  Agents  de  Bourse  are  mutually  liable  for  each 
other's  indebtedness  and  are  practically  subsidized  by  the  French 
Government. 

In  order  to  appreciate  the  high  ethical  and  moral  demands 
to  become  a  member  of  the  New  York  Stock  Exchange,  the 
client  may  read  carefully  the  Constitution  of  the  New  York 
Stock  Exchange. 

Essential  Characteristics 

It  is  essential  to  realize  that  the  Exchange  transacts  no  busi- 
ness of  its  own.     The   Exchange  itself  produces   nothing  but 


18         Handling   a  Brokerage   Account 

service,  and  it  does  not  make  prices.  The  public,  or  the  prin- 
cipals who  give  the  orders,  are  the  ones  who  make  prices. 
Furthermore,  the  New  York  Stock  Exchange  differs  from  all 
other  Exchanges  because  of  the  greater  publicity  concerning  its 
transactions.  The  service  which  it  renders  by  placing  on  the 
ticker  the  price  of  each  transaction  made  prevents  fraudulent 
transactions,  and  gives  the  whole  United  States  immediate  news 
of  what  is  occurring  on  the  Exchange  floor.  It  is  very  difficult 
for  our  English  and  Continental  brethren  to  understand  why  we 
permit  this  publicity,  but  it  is  on  account  of  this  publicity  that 
our  speculative  and  investment  commitments  are  so  much 
better  specialized  than  elsewhere. 


Stock  Exchanges  Classified 

There  are  about  thirty-eight  Stock  Exchanges  in  North 
America.     These  are  necessarily  divided  into:  — 

National  Exchanges,  the  listed  securities  of  which  will  be 
corporations  throughout  the  entire  country  and  in  foreign  lands, 
such  as  the  New  York  Stock  Exchange ; 

Sectional  Exchanges,  the  securities  of  which  cover  a  certain 
sectional  part  of  the  country,  such  as,  for  example,  San  Francisco; 

City  Exchanges,  which  deal  practically  entirely  in  corporate 
enterprises  in  the  city  in  which  they  exist,  as  for  example,  in 
Cleveland,  Cincinnati,  St.  Louis,  and  Washington; 

Mining  Exchanges,  dealing  almost  exclusively  in  local 
mining  properties,  such  as  the  Colorado  Springs  Exchange  and 
the  Salt  Lake  City  Exchange. 

Ordinarily  brokerage  firms  have  connections  of  a  more  or 
less  direct  nature  with  all  Exchanges.  It  should  not  require 
any  extraordinarily  detailed  instructions  to  impress  the  student 
with  the  importance  of  the  economic  value  of  the  Exchange. 


CHAPTER   IV 
GIVING   ORDERS  AND    KINDS   OF   ORDERS 

Time  During  Which  Orders  Remain  Good 

Under  the  American  plan,  unless  otherwise  specified,  the 
stocks  or  bonds  purchased  are  delivered  before  2.15  p.m.  the 
following  day  (with  the  exception  that  when  securities  are 
purchased  on  Friday,  deliveries  are  made  on  the  following  Mon- 
day, Friday  and  Saturday  being  considered  as  one  day).  When 
a  customer  gives  an  order  to  a  broker  to  purchase  or  sell,  unless 
otherwise  specified,  such  an  order  is  construed  to  mean  in  the 
regular  way. 

An  order  given  during  the  day  means  that  it  is  good  for  that 
day  only.  Under  ordinary  circumstances,  this  rule  would, also 
follow  in  connection  with  an  order  which  is  received  in  the  mail, 
but  many  firms  have  changed  this  ruling,  and  orders  which  are 
received  in  the  mail  are  considered  to  be  good  until  they  are 
executed.  This  ruling,  however,  is  only  determined  upon  after 
the  broker  has  so  notified  the  client.  However,  if  a  customer 
sends  in  a  letter  to  sell  one  hundred  shares  of  Northern  Pacific 
at  $83,  the  broker  is  privileged  to  accept  this  order  for  the  day 
only.  Therefore,  it  is  always  safer  to  specify  the  time  for  which 
an  order  is  to  be  good,  if  such  order  is  sent  by  mail. 

Kinds  of  Orders 

The  various  kinds  of  orders  are: 

The  simple  command  without  any  other  qualification, 
means  that  the  order  is  good  for  the  day  only. 

An  order  accompanied  by  the  letters  "G.  T.  W."  means 
that  it  may  be  kept  good  until  the  close  of  the  market  on  the 
Saturday  following  the  day  the  order  was  given  —  good  this  week. 


20       Handling   a  Brokerage   A  c  c  o  u  n  t 

An  order  marked  "G.  T.  C."  means  that  it  is  good  until  it  is 
countermanded,  or  until  it  is  executed,  and  the  purchase  or  sale 
is  actually  made.  This  Good-Until-Countermanded  order  is 
the  most  customary  type,  and  is  utilized  more  than  the  others 
because  of  its  permanent  nature;  but  at  the  same  time  customers 
must  always  specify  "G.  T.  C."  when  giving  an  order  such  as 
this  is. 


Stop  Orders 

Stop  orders,  or  as  they  are  often  called  "stop  loss  orders,"  or 
in  brief  "stops,"  may  be  placed  under  any  of  the  preceding  forms. 
A  stop  order  is  used  for  protection,  either  on  a  purchase  or  a 
sale,  hut  does  not  mean  that  the  customer  will  get  the  price  named 
in  his  order.  For  example,  if  the  customer  owned  ten  shares  of 
Southern  Pacific  at  90  and  gave  his  order  to  sell  at  83  stop,  there 
would  be  a  number  of  possibilities  in  connection  with  the  order. 
As  soon  as  the  sale  is  made  at  83,  the  stop  order  becomes  what 
may  be  termed  alive.  If  other  brokers  are  bidding  83  for 
Southern  Pacific  the  customer  may  get  this  price  for  his  ten 
shares,  but  if  the  stock  is  sold  at  83  and  the  next  best  price  is  82, 
the  customer  will  get  82  for  his  stock.  A  stop  order  is  not  a 
limited  order,  but  in  reality  a  market  order  to  take  effect  as 
soon  as  the  stock  reaches  the  noted  price.  In  inactive  markets, 
or  where  there  is  a  trehiendous  spread  between  the  bid  and  the 
offered  prices,  or  if  a  stock  opens  on  the  following  day  at  a 
different  figure,  the  stop  order  loses  its  protective  qualities. 

Special  Uses  of  Orders 

If  a  customer  desires  to  sell  a  security  which  he  will  not  be 
able  to  deliver  to  the  broker  for  two  or  three  days,  he  may  either 
sell  it  short  temporarily,  the  broker  borrowing  the  stock  until 
the  customer  makes  the  deliv'ery  of  his  shares,  or  he  may  sell 
"at  three  days"  or  "seller  three,"  which  gives  him  the  privilege 
of  waiting  that  period  of  time  before  making  the  delivery,  or  he 
may  make  the  delivery  sooner  on  one  day's  notice  to  the  buyer. 


Giving   Orders   and    Kinds   of  Orders  21 

Securities  may  also  be  sold  on  a  thirty-day  basis,  which  follows 
the  three-day  form  in  every  characteristic. 

Trustees,  estates,  married  women  and  others  who  sell  stocks 
which  require  legal  papers,  also  foreign  clients,  may  make  sales 
of  stock  or  bonds  which  cannot  be  easily  borrowed  by  selling 
"delayed  delivery,"  which  is  a  kind  of  gentleman's  agreement 
between  the  purchaser  and  the  seller  to  wait  a  reasonable  length 
of  time  before  completion  of  the  transaction. 


How  Orders  are  Given 

An  order  may  be  sent  in  by  written  communication,  may  be 
given  verbally,  or  may  be  telephoned. 

When  sent  in  by  ivritten  communication,  the  order  should  be 
specified  clearly,  the  name  of  the  stock  distinctly  given,  the  type 
of  stock  designated,  whether  common  or  preferred;  and  in  case 
of  bonds,  the  exact  title,  the  interest  rate,  and  the  maturity  date 
of  the  bond  should  be  clearly  set  forth.  The  order  should  be 
addressed  to  the  firm  and  not  to  any  partner  or  representative  of 
the  firm. 

When  a  verbal  order  is  given,  the  customer  should  make  very 
certain  that  the  proper  agent  having  authority  receives  the 
order.  After  it  has  been  verbally  communicated  and  passed  on 
for  execution,  it  should  be  written  and  signed  by  the  customer 
and  handed  to  the  Order  Clerk,  or  the  proper  representative  of 
the  firm,  so  as  to  be  on  file. 

If  an  order  is  telephoned,  the  customer  should  make  certain 
that  the  representative  at  the  other  end  of  the  telephone  is  the 
proper  person  to  accept  the  order,  and  the  name  of  the  individual 
should  be  learned  by  the  customer.  The  customer  can  further 
safeguard  himself  by  having  such  representative  of  the  firm 
repeat  back  the  order  which  has  been  given.  Furthermore,  this 
order  should  be  confirmed  in  writing,  no  matter  whether  or  not 
execution  has  been  made. 

In  a  busy  broker's  office,  hundreds  of  orders  are  passing 
through  the  hands  of  the  clerks  during  the  minutes  of  the  day, 
and  every  precaution  should  be  taken  to  see  that  such  orders 


22         Handling   a  Brokerage   Account 

are  properly  cared  for  and  are  correct,  and  much  co-operation  is 
necessary  on  the  part  of  the  cHent. 


Special  Points  Concerning  Orders 

If  the  firm  makes  the  transaction  at  a  price  which  is  difTerent 
from  that  which  the  cHent  beHeves  he  had  ordered,  it  is  the  duty 
of  the  chent  to  prove  that  the  broker  is  wrong.  Should  the 
broker  send  a  report  in  due  season  to  the  client  on  a  transaction 
which  the  client  knows  nothing  about,  or  which  is  different  from 
the  order  given,  the  client  must  at  once  repudiate  or  otherwise 
he  will  assume  responsibility.  Even  if  there  has  been  a  mistake 
made,  or  even  if  the  client  did  not  give  the  order,  he  may  never- 
theless assume  the  obligations  of  the  transaction  reported  to 
him  if  he  so  desires. 

In  giving  an  order  before  the  market  opens  in  the  morning, 
the  client  should  be  sure  to  place  it  in  the  broker's  hands  before 
fifteen  minutes  to  ten  o'clock,  because  after  that  time  the  con- 
gestion is  so  great  that  there  is  apt  to  be  a  delay. 

In  giving  an  order  for  securities  dealt  in  on  the  New  York 
Stock  Exchange,  the  client  should  always  check  the  transaction 
if  it  is  in  one-hundred-share  lots  or  over,  by  referring  to  the 
ticker  tape.  Sometimes  in  an  active  market,  the  ticker  tape  is 
from  a  few  minutes  to  an  hour  behind  the  actual  transactions, 
so  that  the  client  must  always  take  this  feature  into  consideration. 

In  giving  an  order  in  a  stock  which  has  a  wide  opening,  as, 
for  example,  if  the  order  was  to  buy  one  hundred  Southern 
Pacific  and  the  stock  opened  from  100  to  104,  the  client  must  be 
satisfied  with  any  price  between  these  figures.  However,  in 
the  case  of  an  odd-lot  purchase  amounts  below  one  hundred 
shares,  it  is  the  custom  for  the  Odd  Lot  Brokers  to  establish  a 
fair  price. 

Orders  in  bonds,  unless  such  bonds  are  actively  traded  in, 
should  not  be  given  at  the  market,  but  a  quotation  should  always 
be  had  before  an  order  is  given.  This  applies  also  to  so-called 
unlisted  stocks,  which  are  dealt  in  "over  the  counter"  or  by 
telephone  transaction. 


Giving   Orders   ajid    Kinds   of  Orders  23 

Orders  given  in  Curb  securities  should  likewise  be  carefully 
checked  up,  and  seldom  given  at  the  market  unless  the  stock  is 
very  active  and  the  firm  with  which  the  customer  is  dealing  can 
be  depended  upon. 

As  soon  as  the  order  is  given  to  the  customer's  man,  it  is 
handed  to  the  Order  Department  and,  as  described  in  Chapter 
II,  goes  through  various  bookkeeping  trials  and  tribulations. 
These  interest  the  customers  less  than  the  fact  that  it  is  as  quickly 
as  possible  communicated  to  the  floor  of  the  Stock  Exchange. 


Handling  Orders  on  Exchange  Floor 

The  clerk  at  the  telephone  on  the  floor  of  the  Exchange  writes 
down  the  order  on  a  sheet  of  paper,  and  either  sends  it  by 
messenger  to  the  specialist  dealing  in  that  particular  stock  or 
touches  an  electric  button  at  the  side  of  his  telephone.  This 
electric  button  displays  on  either  side  of  the  room  a  white  number 
on  a  black  background.  Each  broker  has  his  own  number  and 
he  soon  learns  to  "feel"  that  number  flash.  This  flash  calls 
him  to  his  telephone  clerk  or  he  may  send  a  messenger  boy,  but 
in  either  case  he  himself  receives  the  order  and  as  soon  as  possible 
makes  the  purchase  or  sale  through  another  broker.  He  then 
returns  the  order  personally  or  by  messenger  to  the  telephone 
clerk  who  reports  it  back  over  the  wire,  and  it  is  communicated 
to  the  client.  In  the  case  of  branch  office  customers,  it  is,  of 
course,  necessary  to  telegraph.  And  where  the  client  is  not  in 
touch  with  the  telephone  or  telegraph,  the  order  is  communicated 
by  written  means  on  a  specialized  form  for  such  communication. 

The  chances  for  making  an  error  on  any  order  are  exceedingly 
numerous  because  of  the  fact  that  under  ordinary  circumstances 
the  order  passes  through  from  eight  to  ten  hands  before  it  has 
been  executed.  Market  orders  are  often  given,  communicated, 
filled,  and  reported  back  in  less  than  five  minutes,  so  that  taking 
everything  into  consideration,  such  as  the  speed  and  the  number 
of  opportunities  for  error,  the  reasons  are  clear  why  the  client 
should  co-operate  to  the  best  of  his  ability. 

The  writer,  while  a  member  of  the  New  York  Stock  Exchange, 


24         Handling   a  Brokerage   Account 

quoted  Pennsylvania  stock  in  the  New  York  market.  The 
quotation  was  cabled  to  the  market  in  London,  a  purchase  was 
made  in  London,  the  report  cabled  back  to  New  York  and  the 
like  amount  sold  by  the  writer  in  the  New  York  market  —  all 
within  five  minutes. 

Commission  Rates 

The  rate  of  commission  for  a  non-member  of  the  New  York 
Stock  Exchange  is  the  minimum  commission,  and  the  broker  is 
privileged  to  charge  more  if  the  client  is  willing  to  pay  more,  but 
under  no  consideration  can  the  broker  charge  less  than  the 
following  rates,  either  directly  or  indirectly: 

Commission  Rates 
New  York  and  Philadelphia  Stock  Exchanges 

Stocks  selling  under  $10 $7.50  per  100  shares 

Stocks  selling  at  $10  and  under  $125  ....      15.00  per  100  shares 

Stocks  selling  at  $125  and  over 20.00  per  100  shares 

Minimum  Commission,  $1.00 

Commission  rates  on  the  Chicago  Stock  Exchange  have  been 
raised  to  the  same  schedule  as  above.  Chicago  minimum 
commission,  $2.00. 

Curb  commissions  are  of  a  more  arbitrary  nature  and  it  is 
well  for  the  client  to  make  inquiry  in  connection  with  the  rates 
from  the  broker  before  giving  the  order.  Possibly  the  following 
table  is  the  most  equitable  arrangement  at  the  present  time  and 
brokers'  customers  may  use  this  table  as  a  comparison  with  their 
charges : 

New  York  Curb  Stocks 

Selling  under  $1     2%  of  total  amount  involved 

Selling  at  $1  and  under  $3   $4.00  per  100  shares 

Selling  at  $3  and  under  $5 5.50  per  100  shares 

Selling  at  $5  and  under  $10 7.50  per  100  shares 

Selling  at  $10  and  under  $125  15.00  per  100  shares 

Selling  at  $125  and  above    20.00  per  100  shares 

Minimum  commission  $1.00 


CHAPTER   V 
INTEREST   CHARGES   AND    MARGINS 

Call  and  Time  Money  Rates 

Interest  charges  are  determined  by  the  average  call  money 
rate  for  the  month,  plus  the  average  time  money  rate  for  the 
month,  plus  the  rate  of  interest  which  the  broker  demands  for 
his  capital;  these  three  items  are  averaged. 

Time  money  and  call  money  rates  differ  to  a  startling  degree 
upon  occasion;  sometimes  the  broker  pays  higher  for  his  time 
money  than  his  call  money  and  then  again  he  may  be  fortunate 
in  having  a  great  deal  of  time  money  at  5  per  cent  when  call 
money  is  soaring  to  10  and  15  per  cent.  Thus  a  customer's 
interest  charge  per  month  depends  to  some  degree  upon  the 
foresight  of  the  broker  in  judging  the  interest  rates. 

Call  money  is  money  which  is  borrowed  by  the  broker  on 
any  one  day  which  may  be  called  back  by  the  bank  on  the  next 
day  or  returned  by  the  broker  on  the  next  day;  and  the  interest 
rate  on  this  money  is  changed,  or  rather  renewed,  every  day  if 
not  returned. 

Time  money  is  money  which  is  borrowed  from  a  bank  by  the 
broker  for  a  period  of  time  at  one  rate  during  that  time  —  for 
thirty  days,  for  six  months,  for  a  year,  or  for  over  a  year,  the 
latter  term  meaning  that  money  borrowed  any  time  during  1923 
would  not  be  paid  back  until  the  second  day  of  January,  1924. 

How  Kind  of  Securities  Affect  Rates 

The  type  of  security  which  the  customer  carries  on  margin 
also  has  a  bearing  upon  the  amount  of  interest  he  pays.  Should 
a  customer  be  carrying  all  industrial  securities,  his  broker  must 
pay  higher  interest  for  a  loan  secured  by  all  industrial  collateral, 
than  if  the  collateral  were  evenly  divided  between  rails  and 
industrials. 


26         Handling   a  Brokerage   A  cc  o  n  n  t 

A  client  who  carries  securities  of  one  kind  in  a  large  amount 
such  as,  for  example,  five  thousand  American  Car  Foundry,  might 
have  to  have  a  special  loan  made  for  him  at  a  high  rate  of  interest. 

The  client  who  carries  in  his  account  odd  lots  —  amounts 
less  than  one  hundred  shares  —  should  expect  a  higher  rate  of 
interest  charge,  since,  as  a  rule,  banks  do  not  permit  odd  lots  of 
securities  in  their  loans  and  the  trouble  in  handling  these  odd  lots 
necessitates  extra  clerical  work,  and,  therefore,  extra  overhead. 

Unlisted  securities  —  those  not  having  a  ready  market  — 
are  not  usually  acceptable  for  loans,  and  in  many  instances,  the 
broker  finds  it  necessary  to  make  a  special  bank  loan  so  that  in 
this  case  the  interest  rate  is  higher. 

The  broker's  customer  is  charged  a  higher  rate  of  interest 
than  the  average  which  the  broker  pays,  because  the  broker 
deserves  a  profit  for  the  cost  of  handling  the  marginal  account. 

Determining  What  Rates  to  Charge 

There  are  a  number  of  features  in  connection  with  deter- 
mining this  cost  of  handling  the  marginal  account  which  the 
average  customer  does  not  usually  take  into  consideration. 

As  an  illustration,  we  give  a  $10,000,000  borrowing  by  the 
broker,  and  determine  the  daily  rate.  Each  daily  rate  is  added 
together  during  the  month,  and  divided  by  the  number  of  days 
to  get  the  average  rate  for  the  month.  Thus,  if  the  average  for 
each  day  of  the  month  was  6  per  cent,  the  average  for  the  month 
would  be  6  per  cent.     But  suppose  — 

$500,000  Odd  Lot  Loans 12% 

1,000,000  Special  on  Inactive  Stocks 15% 

3,000,000  Industrial  Money    10% 

2,000,000  Regular  Money  renewal 8% 

3,500,000  At  Renewal  above  Rate 9% 

The  broker  was  borrowing,  in  the  first  case,  $500,000  and 
the  collateral  used  for  these  loans  was  in  odd  lots,  which  made 
extra  clerical  labor.  We  will  assume  that  the  renewal  rate  for 
money  on  this  particular  day  was  8  per  cent  and  the  odd  lots  in 
question  were  mostly  industrial  stocks.     It  w^ould  be  perfectly 


Interest   Charges   and   Margins  27 

fair  for  the  bank  to  charge  the  broker  12  per  cent.  We  also  find 
that  the  broker  held  for  his  clients  securities  calling  for  $1,000,000 
of  borrowing  on  stocks  which  were  inactive,  not  having  a  ready 
market.  Possibly  some  of  these  were  traded  in  on  the  Curb  or 
over  the  counter,  and  the  fair  rate  on  this  would  be  15  per  cent. 
We  also  find  that  our  broker  was  borrowing  $3,000,000  on  loans 
made  up  of  industrial  securities,  and  it  was  therefore  fair  to 
charge  him  2  per  cent  above  the  renewal  rate,  or  10  per  cent. 
There  are  on  the  list  $3,500,000  of  renewal  loans  of  good  securities 
which  stand  at  9  per  cent.  The  reason  that  this  last  item  is 
standing  at  9  per  cent  is  because  it  was  borrowed  previously  at 
a  high  figure,  and  the  banks  loaning  this  money  did  not  care  to 
reduce  the  rate  to  the  8  per  cent  renewal  rate  of  this  particular 
day.  Rather  than  pay  off  these  loans  and  attempt  to  borrow 
in  the  general  market  at  the  renewal  rate,  the  broker  takes  no 
chances  and  accepts  a  rate  for  renewal  1  per  cent  above  the 
regular  renewal  rate. 

The  average  rate  for  this  $10,000,000  would  be  9.85  per  cent 
for  the  day,  and  if  each  day  of  the  thirty  days  of  November,  1919, 
had  the  same  average  rate,  the  broker  would  be  justified  in 
charging  his  customer  IH  per  cent  for  the  money. 


Renewal  Rates  Charged  by  Banks 

The  renewal  rate  is  established  at  the  money  post  on  the 
New  York  Stock  Exchange,  and  is  determined  by  taking  the 
average  rate  on  the  transactions  up  to  about  noon  of  each  day, 
Saturday,  of  course,  excepted.  This  rate,  however,  is  not  always 
observed  by  banks,  and  is  merely  one  medium  by  which  is  de- 
termined a  basis  for  operation.  Banks  whose  loan  clerks  confer 
daily,  make  their  own  decisions  regarding  renewals.  If  the 
broker  does  not  desire  to  accept  the  renewal,  the  loans  will  be 
called.  There  are  banks  (for  example  the  National  City  Bank), 
which  never  loan  money  above  6  per  cent,  but  after  a  period  of 
high  money,  these  6  per  cent  banks  do  not  reduce  their  rate  so 
rapidly,  and  there  is  usually  a  tacit  understanding  between  the 
broker  and  the  bank  of  this  type  to  permit  a  loan  to  stand  at 


28         Handling   a  Brokerage   Account 

6  per  cent  after  it  has  been  much  higher,  even  when  the  renewal 
rate  is  as  low  as  2  per  cent. 


Why  Brokerage  Charges  are  Reasonable 

Brokerage  charges,  both  for  interest  and  commissions,  are 
doubtless  lower  for  the  amount  of  work  done  than  in  any  other 
form  of  business  enterprise.  The  risk  involved  on  the  part  of 
the  broker  is  very  real  and  one  error  perhaps  wipes  out  the  profits 
of  many  transactions. 

The  writer  at  one  time  had  an  order  to  buy  five  hundred 
shares  of  stock,  on  which  the  commission  would  amount  to  $75. 
Through  no  fault  of  his  own,  errors  were  involved  in  the  transac- 
tion, and  the  loss  which  resulted  was  evenly  divided  between  the 
writer  and  another  broker,  with  the  result  that  the  writer  was 
out  $1,400  on  a  transaction  upon  which  he  was  to  receive  com- 
missions of  $75. 

If  the  broker  charges  the  customer  two  or  three  per  cent 
above  the  average  interest  rate  for  the  month,  he  is  not  charging 
too  much  because  there  is  a  possibility  that  some  of  his  cus- 
tomers will  not  "make  good"  on  their  marginal  requirements, 
and  in  an  active  market  before  the  account  could  be  liquidated 
the  broker  would  stand  a  loss.  This  was  the  situation  once  with 
the  writer,  where  the  interest  charge  against  the  client  for  one 
month  amounted  to  $25,  the  profit  $5;  and  the  account  was 
sold  out  at  a  loss  to  the  broker  amounting  to  over  $200. 

The  overhead  cost  of  brokerage  business  in  former  days  was 
taken  care  of  to  a  great  extent  by  the  profit  made  from  the 
interest  charges,  but  in  recent  times  this  is  impossible.  Higher 
rentals  in  the  district  where  every  inch  of  space  is  worth  its 
"weight  in  gold,"  efificient  and  therefore  high  salaried  clerks, 
intricate  and  highly  developed  account  systems,  hundreds  of 
necessary  governmental  and  state  reports  on  taxation,  heavy 
telephone  charges,  tremendous  telegraph  private  wire  charges, 
and  incidentals  too  numerous  to  mention,  make  it  necessary  for 
commissions  to  be  applied  to  take  care  of  some  of  the  overhead, 
instead  of  being  direct  profit  through  investment  in  a  seat  on  the 


Interest   Charges   and   Margins  29 

Exchange.  Furthermore,  custom  has  brought  about  Service 
Department  activities  of  a  costly  nature,  which  is  not  directly- 
productive  of  commissions,  and  this  must  be  added  to  the  costs. 
The  Service  Department,  inclusive  of  advertising  expenditures, 
in  one  medium-sized  brokerage  firm  costs  that  firm  $25,000  a  year. 

What  are  the  Marginal  Requirements? 

At  the  time  of  the  well-known  investigation  of  the  Stock 
Exchange  by  Ex-Governor  Hughes'  committee,  the  report  stated 
that  there  was  nothing  of  a  detrimental  economic  nature  in 
marginal  transactions;  but  recommendation  was  made  to  the 
brokerage  fraternity  that  marginal  requirements  from  customers 
be  advanced  to  a  more  protective  plane.  To  a  great  extent  this 
has  been  carried  out. 

The  following  margin  requirements  are  those  which  are  more 
or  less  customary  in  use  at  the  present  time.  In  connection  with 
Curb  securities,  however,  7tone  should  be  carried  on  margin,  as 
the  possibilities  for  loss  and  for  violent  fluctuations  are  serious. 

Margin  Requirements 
New  York,  Philadelphia  and  Chicago  Stock  Exchange 

Selling  under  $25    331% 

Selling  at  $25  and  under  $50     10  points 

Selling  at  $50  and  under  $75     15  points 

Selling  at  $75  and  under  $100    20  points 

Selling  at  $100  and  under  $125     25  points 

Selling  at  $125  and  under  $200    40  points 

Selling  at  $200  and  above On  request 

New  York  Curb  Market 

SeUing  under  $15     331% 

Selling  at  $15  and  under  $25     5  points 

Selling  at  $25  and  under  $50    7|  points 

Selling  at  $50  and  under  $100     10  points 

Selling  at  $100  and  under  $125     15  points 

Selling  at  $125  and  under  $200     20  points 

Selling  at  $200  and  under  $300     30  points 

Selling  at  $300  and  above 50  points 


30        Handling   a  Brokerage   A  c  c  ottn  t 

Keeping  Good  the  Margin 

Since  all  the  profit  of  a  transaction,  or  the  loss,  accrues  to  the 
customer  and  the  broker  has  no  interest  in  the  account  other 
than  the  actual  amount  of  money  which  he  has  loaned  to  the 
client,  it  is  the  place  and  the  duty  of  the  client  to  give  the  broker 
the  utmost  in  co-operation  in  keeping  his  margin  at  a  point,  or 
above  the  point,  which  the  broker  requires. 

Every  careful  brokerage  firm  makes  an  agreement  with  the 
customer  when  the  account  is  opened  which  is  to  the  efifect  that 
the  broker  will  have  the  privilege  of  liquidating  the  account  to 
protect  said  broker,  when  it  is  believed  that  the  time  has  come 
for  this  action;  with  the  understanding,  of  course,  that  due 
notification  be  given  to  the  client  and,  whenever  possible,  time 
to  build  up  his  margin. 

Calls  for  margin  in  a  very  active  market  may  be  made  by 
telephone,  and  followed  up  by  letter  confirmation,  and  the 
letter,  if  sent  to  the  last  address  given  by  the  client,  stands  as 
sufficient  evidence  of  notification.  The  laws  relating  to  broker 
and  client  in  connection  with  this  margin  feature,  and  especially 
in  connection  with  the  selling  out  or  the  buying  in  of  an  account, 
are  numerous  and  intricate,  and  hence  will  be  taken  up  later  on 
in  a  separate  chapter  (see  Chapter  VIII). 

The  broker  has  the  privilege  of  determining  whether  the 
margin  given  him  is  what  he  desires  or  does  not  want.  Cash, 
certified  checks,  bank  drafts  or  accepted  checks  are  good. 
Margins  submitted  in  the  form  of  other  securities,  bonds  or  stocks, 
or  notes  may  not  be  deemed  acceptable  by  the  broker. 

The  margin  clerk  and  the  bookkeeper  of  a  brokerage  firm  as 
well  as  the  Cashier,  are  always  ready  to  communicate  either 
directly,  or  through  the  customer's  man,  any  information  regard- 
ing the  account  of  the  client  to  the  client  himself.  Hence  the 
client  who  does  not  keep  his  account  in  good  condition  is  not 
co-operating  properly  with  his  broker.  And  a  broker,  likewise, 
who  would  accept,  or  continue  to  accept,  an  account  which  is 
not  properly  conditioned,  is  a  dangerous  one  with  whom  to  deal, 
for  carelessness  in  the  brokerage  business  is  the  worst  of  all  evils. 


Interest   Charges   and   Margins         31 

Typical  Illustrations 

We  have  noted  above  what  margin  consists  of  and  how  it  is 
cared  for,  and  when  we  discuss  the  broker's  statement  following 
this  paragraph,  we  will  discover  just  what  margin  means.  The 
following  illustrations,  taken  from  the  writer's  book  entitled 
"You  and  Your  Broker,"  can  hardly  be  improved  upon  by  new 
illustration. 

1.  Smith  buys  100  Steel  com.  at  113  and  gives  his  broker 
$2,000.  The  broker  figures  the  margin  by  dividing  the 
100  shares  into  the  $2,000  which  gives  Smith  20  points 
margin. 

(For   the   purpose   of   illustration   and   to   avoid    too 
many   figures,    there   will    be   omitted    from    the   illus- 
trations the  items  of  commission  and  incidental  charges.) 
If  Steel  com.  declines  to  93,  a  twenty-point  loss,  the  broker 
would  sell  the  100  shares,  provided  Smith  did  not  place  more 
margm.     The  stock  cost  $11,300  and    was  sold   for  $9  300    a 
difference  of  $2,000,  just  the  amount  of  the  margin. 

2.  Smith  gives  the-broker  $2,000  Reading  gen.  4%  bonds 
market  value  $2,000  and  bays  100  Steel  at  113.     Every 
$1,000    bond    is   equivalent    to    10   shares   of   stock   in 
margin  figuring.     Smith  has  now   120  shares  of  stock 
or  a   margin   of    161    points.     The   broker   has    loaned 
Smith  the  full  purchase  price  of  the  Steel,  $11,300.     If 
the  price  of  Steel  drops  to  95  and  the  value  of  the  bond 
to  90  the  margin  will  be  wiped  out.     The  broker  will 
sell  100  Steel  for  $9,500  and  the  bonds  for  $1,800,  a 
total  of  $11,300,  which  he  originally  invested  for  Smith. 
3.  Smith  gives  his  broker  the  $2,000  bond  and    buys    100 
Steel  at   113  as  above,  but  in  addition  he  purchases 
1,000  Success  Mines  on  the  Curb  at  45  cents  ($450). 
The  average  broker  will  not  even  include  this  stock  in 
the   margin   and   will   deduct   the   $450   at   once   from 
Smith's  margin  credit.     If  the  bonds  drop  to  90  ($1,800) 
the  broker  will  sell  the  Steel  at  99|. 


32         Handling   a  Brokerage   A  c  c  on  n  t 

First  position  in  example  ?>: 

$2,000  Rdg.  4%  bond   .  .  . $2,000 

100  Steel    11,300 

Value  of  account    $13,300 

Cost  of  100  Steel    11 ,300 

Equity  or  Margin    $2,000 

Second  position  in  example  3 : 

$2,000  Rdg.  4%  bond   $1,800 

100  Steel    9,950 


$11,750 
Less  cost  of  Success 450 


Value  of  account    $11,300 

Cost  of  100  Steel    11,300 

Equity  or  Margin    $  0 

In  the  third  example  shown,  the  broker  would  protect  himself 
by  placing  a  stop  order  on  Steel  at  99|  and  the  Rdg.  bond  at 
90.  When  these  two  were  sold  the  account  would  be  even, 
eliminating  the  matter  of  commissions  and  interest,  and  the 
broker  would  probably  turn  over  the  Success  Mines  to  the 
customer  to  do  with  as  he  desired.  When  the  stock  declines  or 
advances,  as  the  case  may  be,  so  as  to  come  near  the  limit  of 
margin  furnished,  the  broker  may  demand  any  one  of  three 
actions  by  the  customer  to  supply  additional  margin,  take  up 
the  account  in  full  direct,  or  have  it  transferred  to  another  firm. 

Selling  price  —  Debit  Balance-;- No.  Shares  =  Point  Margin. 
The  Margin  on  a  "short  account"  can  also  be  in  formula: 
Credit      Balance — Purchase      Price-^No.      Shares  =  Points 
Margin. 


CHAPTER   VI 
THE   BROKER'S   STATEMENT 

Checking  Over  Our  Actual  Account 

Nine-tenths  of  all  clients  of  a  brokerage  firm  accept  their 
statements  without  any  checking  or  without  going  over  them 
carefully.  Inasmuch  as  broker's  bookkeepers  are  human  beings, 
mistakes  are  liable  to  occur  and,  in  consequence,  if  a  mistake  is 
made  the  chances  are  that  the  client  will  not  discover  it. 

The  check  upon  the  broker's  statement  which  clients  should 
make,  can  best  be  illustrated,  it  appears,  by  taking  an  actual 
statement  and  working  through  it  point  by  point.  In  this 
instance,  the  statement  used  is  of  a  very  small  account  of  the 
writer,  which  contains,  however,  almost  all  the  elements  which 
go  to  make  up  the  average  statement.  The  statements  are 
marked  "One,"  "Two,"  "Three,"  and  "Four."  Let  us  discuss 
them  informally,  the  writer  being  permitted  to  use  the  first 
person;  and  the  client,  we  suggest,  referring  to  the  various 
statements  as  their  transactions  are  discussed. 

Statement  No.  1 

In  statement  No.  1  (see  figure  on  next  page)  on  October  31st, 
1919,  I  had  in  the  possession  of  my  broker,  ten  shares  of  Willys- 
Overland  preferred,  fifteen  shares  of  Northern  Pacific,  $1,000  par 
value  Canadian  Pacific  6  per  cent  note,  and  $2,000  Liberty  4th 
4j  per  cent  bonds;  and  against  this  was  a  debit  balance  of 
$3,064.11,  which  was  the  amount  I  owed  my  broker.  Thirty 
days'  interest  on  this  amount  at  6  per  cent  was  $15.32,  because 
the  interest  is  figured  to  the  end  of  each  month,  and  compounded 
twelve  times  a  year. 

On  the  14th  of  the  month  I  bought  ten  shares  of  Fisk  Tire  at 
41 1;  it  will  be  noted  that  $1.50  commission  is  added  to  this  item 


34 


Handlin  e 


Brokerage   Account 


The  Broker's   Statement  ZS 

to  bring  the  amount  to  $412.75.  On  the  17th  of  the  month,  I 
sold  this  Fisk  Tire  at  44|,  which  would  be  $443.75.  From  this 
has  been  deducted  $1.50,  leaving  $442.25,  and  12  cents  for  State 
and  Federal  taxes,  so  that  the  extension  is  $442.13. 

The  client  will  note  that  in  every  instance,  with  the 
exception  of  a  short  sale,  interest  is  credited  and  debited  at  6 
per  cent,  and  that  the  total  difference  in  this  particular  No.  1 
statement  is  a  debit  against  me  at  the  end  of  the  month,  amount- 
ing to  $13.88.  But  inasmuch  as  the  proper  average  rate  during, 
the  month  amounted  to  9  per  cent,  I  am  charged  12  per  cent, 
and  on  the  30th  of  the  month  my  account  is  debited  wdth  $27.76.. 

A  Syndicate  Allotment 

On  the  21st  of  the  month,  I  purchased  thirty-six  shares  of 
Maracaibo  at  $26  a  share.  It  will  be  noted  that  no  commission 
has  been  charged.  The  reason  for  this  is  that  I  became  part 
of  a  syndicate,  and  my  allotment  amounted  to  thirty-six 
shares;  hence,  there  was  no  charge  necessary  other  than  the 
actual  debit  of  the  amount,  which  was  thirty-six  times  $26. 

A  Short  Sale 

On  the  24th  of  November,  I  sold  ten  shares  of  United  States- 
Steel  short  at  105|  and  the  proper  extension  is  $1,049.35,  but  I 
am  allowed  no  interest  on  this  amount  because  this  stock  was- 
borrowed  against  my  short  sale  and  that  same  amount  of  money 
was  paid  out  to  the  broker  from  whom  the  ten  shares  were 
borrowed;  and,  in  almost  every  case,  if  there  is  interest  accruing 
from  the  money  paid  out  for  borrowed  stock,  it  goes  directly  tO' 
the  broker. 

On  the  thirtieth  of  the  month,  the  clients  will  note  that 
the  bookkeeper  has  placed  a  debit  in  my  account  of  ten  Steel 
common  amounting  to  $1,020.00.  Now,  I  did  not  "buy  in" 
that  Steel  and  was  still  short  of  the  stock;  but  at  the  end  of  each 
month  short  transactions,  at  no  matter  what  price  they  have 
been  sold,  are  placed  at  the  market  price  on  the  last  day  of  the 
month,  because  the  broker  continued  to  borrow  this  stock  at  the 


36         Handling   a   Brokerage   Account 

market  price,  and  received  interest  at  the  market  price;  and, 
therefore,  as  a  matter  of  convenience,  so  as  to  separate  the  short 
from  the  long  account,  such  an  arrangement  is  effected. 

In  looking  over  my  statement,  it  will  be  discovered  that  if 
this  arbitrary  transaction  had  not  been  entered,  my  debit  balance, 
instead  of  being  $1,363.34,  which  would  be  the  basis  for  figuring 
interest  the  coming  month,  would  have  amounted  to  $29.35 
more;  so,  therefore,  on  account  of  the  drop  in  the  market,  I  am 
the  gainer  by  not  having  interest  charged  me  the  coming  month 
on  that  $29.35. 

Statement  No.  2 

The  second  statement  (see  the  preceding  figure)  shows  my 
long  and  short  account  on  the  last  day  of  November. 

It  is  well  to  note  that  when  I  sold  my  2M  Liberty  4j's  on 
November  20th,  that  I  was  given  credit  for  the  accrued  interest 
on  these  bonds  since  the  last  interest  period,  when  the  coupons 
were  taken  off,  since  it  is  essential  that  the  customer,  assure 
himself  that  he  receives  proper  interest.  In  this  case  the  bonds 
were  sold  at  $92.94,  per  $100  bond,  which  amounted  in  all  to 
$1,858.80.  Interest  on  these  bonds  was  paid  previously  on 
October  15th,  so  that  there  were  thirty-five  days  interest  due 
me  on  2M  at  4j  per  cent,  which  amounted  to  $8.26,  thus  bringing 
my  total  to  $1,867.06;  but  I  was  charged  60  cents  commission 
so  that  my  actual  total  is  as  designated  on  the  statement  — 
$1,866.46. 

Statement  No.  3 

On  the  third  statement  (for  which  see  the  next  page),  it  will 
be  noted  that  I  was  still  short  ten  shares  of  United  States  Steel 
common,  and  during  the  time  that  I  was  short  of  the  stock,  there 
was  a  dividend  declared  amounting  to  $12.50  on  my  ten  shares. 

Inasmuch  as  I  was  borrowing  these  ten  shares  from  some  other 
broker,  it  was  necessary  for  me  —  through  my  broker,  of  course 
—  to  pay  him  this  dividend;  and  therefore  my  account  was 
charged  $12.50. 


The  Broker's   Statement 


3T 


447461 


38         Hand!  i  u  g   a   Brokerage   A  c  c  o  u  ii  t 

Now,  I  originally  sold  the  ten  shares  of  Steel  so  that  I  was 
given  credit  for  $1,049.35,  but  for  the  sake  of  adjusting  the 
short  account,  I  was  made  short  on  December  1st  at  $1,020, 
because  the  stock  sold  at  $102  on  that  date.  Thus  I  had  an 
apparent  profit  of  $29.50.  From  this  apparent  profit  must  be 
deducted  $12.50,  which  was  the  charge  against  me  for  the 
dividend,  leaving  $17  profit.  But  on  Decerrwber  17th  I  purchased 
the  stock,  or  covered  my  short  sale,  at  103|,  which  debited  my 
account  $1,036.50;  so  that  I  had  a  paper  loss  during  the  month 
of  the  amount  between  $1,036.50  and  $1,020,  or  $16.50.  This 
loss  subtracted  from  my  paper  profit  of  $17.00,  gave  me  an  actual 
profit  on  the  transaction  of  50  cents  — •  less,  of  course,  whatever 
interest  was  charged  against  me  from  the  purchase  on  the  17th 
which  shows  $2.42,  and  the  interest  at  the  first  of  the  month  on 
$1,020,  which  shows  $2.38  or  a  loss  of  4  cents  interest  at  6  per 
cent.  Since  I  was  charged  9  per  cent,  my  loss  would  be  one- 
third  more  or  a  total  of  S\  cents,  thus  reducing  my  profit  to  44| 
cents  on  this  particular  transaction. 

The  other  items  on  the  statement  do  not  offer  any  special 
difficulty  to  the  reader,  for  I  am  charged  with  interest  items, 
charged  with  cash  and  checks  which  I  have  withdrawn,  and 
credited  with  monies  which  I  placed  in  the  account  on  December 
8th  and  16th. 

The  subscriber  should  be  careful  to  figure  his  tax  charges 
properly.  They  amount  on  the  New  York  State  tax  to  2  cents 
a  share  on  every  one  hundred  dollars  par  value,  and  2  cents  a 
share  for  Federal  taxes  on  the  basis  of  every  one  hundred  dollar 
par  value;  but  in  no  case  will  the  tax  be  less  than  2  cents  for  the 
Federal  and  State  items,  based  both  on  the  par  value  and  the 
selling  price  of  the  stock  as  hereafter  described. 


Proving  the  Statement 

It  is  often  wise  for  the  customer,  and  it  is  necessary  for  the 
student  who  wishes  to  secure  a  thorough  understanding  of  the 
subject,  to  prove  the  account.  This  may  be  done  as  shown  in 
the  accompanying  statement. 


The  Broker's   Statement  30 

PROVING  THE  ACCOUNT 

October  31st 

10     Willys  Overland  Pfd.  90 $900.00 

15     Northern  Pacific  90   1,350.00 

IM  Canadian  Pacific  6%  Notes  100    1,000.00 

2M  Liberty  4th  4H%  92 1,840.00 

$5,090.00 
Debit  Balance  in  Account    3,064.11 

October  31st  Equity   $2,025.89 

55  shares  in  account  — -  Margin  over  36  points 

Equity  $2,025.89 

Profit  10  Fisk  Tire 29.38 

Profit  2M  Liberty  Bonds 26.46 

Profit  36  Maracaibo    92.16 

Loss  20  Int.  Products     $127.80 

Draft 92.16 

Interest 27.76 

Check 100.51 

Profit  10  Steel  Com.  (short)  to  balance  account 29.35 

Profit  10  Willys  Pfd 6.85 

Dividend  10  Steel  (short)    12.50 

Draft 14.00 

Loss  10  Steel  on  Purchase  from  Short  Account 16.50 

Cash    25.00 

Check 5.00 

Interest 7.44 

Profit  10  Steel     6.60 

Check 25.00 

Deposited  50  —  20  —  140    210.00 

$453.67     $2,426.69 
December  31st 453.67 

.973.02 

15  Northern  Pacific  90     $1,350.00 

1  M  Canadian  Pacific  6%  100   1,000.00 

20     Fisk  Tire  413^ 830.50 

$3,180.50  /<:<■ 

Debit  Balance 1,206.48 

$1,973.02 


40         H andli^i g   a  Brokerage   Account 

Keeping  Essential  Records 

When  the  customer  receives  any  acknowledgment  or  report 
from  his  broker,  he  should  keep  a  careful  record  In  his  own  books 
of  account  and  check  these  books  of  account  with  the  brokerage 
statement  at  the  end  of  each  month.  Most  of  the  brokerage 
firms  supply  their  clients  with  memorandum  and  account  books 
of  this  character  ruled  out  in  the  form  of  a  statement,  but  it  is 
also  desirable  to  keep  a  careful  record  for  income  tax  purposes. 
We  enclose  with  this  Text  a  copy  of  one  of  the  best  forms  of 
security  registers  which  has  been  devised. 

There  is  no  universal  form  of  statement  rendered  by  brokers, 
but  all  forms  used  can  easily  be  reduced  to  the  fundamental 
elements  —  Cash,  Credits  or  Debits,  Purchases  or  Sales,  and 
Interest. 

When  a  client  is  actively  engaged  in  stock-market  transactions 
it  is  sometimes  advisable  to  have  the  firm  separate  his  short 
account  from  his  long  accounts,  and  give  him  two  separate 
statements  monthly. 

Watching  Special  Points 

The  broker,  as  a  rule,  will  allow  a  credit  interest  on  margin 
deposited  for  a  short  account,  but  not  on  the  credit  balances. 

When  a  stock  which  a  client  holds  loans  on  the  Stock  Ex- 
change at  a  premium,  i.e.,  where  there  are  so  many  others  short  of 
the  stock  that  the  supply  is  limited  and  the  broker  is  willing  to 
give  his  money  at  the  market  value  of  the  stock  to  borrow  the 
stock,  without  receiving  interest,  and  in  addition  pay  a  premium 
for  the  privilege  of  borrowing  the  stock  —  this  premium  belongs 
to  the  customer  who  is  long  of  the  stock.  It  is  desirable  for  the 
customer  to  keep  himself  informed  regarding  the  loaning  value 
of  the  stocks  of  which  he  is  long,  so  that  he  may  know  whether 
or  not  the  broker  has  given  him  this  credit  on  the  premiums. 

All  the  dividends  accruing  on  stock  purchased  belong  to  the 
customer,  and  not  to  the  broker,  and  the  broker  is  liable  to  the 
customer  for  the  collection  of  these  dividends.  When  the 
check  comes  to  the  broker  from  the  company  which  has  declared 


The  Broker' s   Statement  41 

the  dividend,  the  broker  should  apportion  this  dividend  in  the 
right  proportions  among  his  customers. 

But  inasmuch  as  the  customer's  stock  is  likely  to  stand  in 
the  broker's  name,  and  be  combined  with  other  shares  of  stock 
of  the  same  kind  owned  by  other  customers,  it  is  quite  possible 
for  the  broker  to  fail  through  an  error  to  credit  these  dividends. 

As  soon  as  the  stock  sells  ex-dividend  on  the  Exchange,  the 
dividend,  though  it  may  not  be  paid  for  months  afterwards, 
nevertheless  belongs  to  the  customer  who  is  long  of  the  stock  on 
tha*t  particular  day.  It  is  not  the  custom  to  credit  this  dividend 
to  the  customer  until  it  is  received,  so  that  oftentimes  a  client 
may  sell  his  stock  and  close  out  his  account  before  the  dividend 
is  actually  paid.  This  is  another  matter  which  necessitates 
careful  watching  on  the  part  of  the  customer  to  see  that  he 
collects  this  dividend  even  should  the  account  have  been  closed. 


CHAPTER   VII 
TRANSFERS   AND    DELIVERIES 

Why  Stocks  Should  be  Transferred  to  One's  Own  Name 

Whenever  possible,  if  a  stock  is  owned  outright,  the  cHent 
should  have  it  transferred  to  his  own  name.  It  is  hardly  neces- 
sary to  go  into  details  as  to  the  reasons  for  this,  but  possibly  it 
is  well  to  summarize  them. 

1.  In  case  of  any  controversy,  so  long  as  the  stock  is  in  the 

customer's  name  he  has  possession;  and  it  is  much  easier 
to  prove  possession  with  the  stock  in  one's  own  name 
than  if  it  is  in  some  one  else's  name. 

2.  Unless    the   customer   has   the   stock   in    his   own    name, 

always  assuming  that  he  owns  it  outright,  he  may  not 
receiv^e  the  dividends  which  he  is  due  to  receive.  If  the 
stock  is  in  the  name  of  some  one  else,  it  may  be  very 
inconvenient  to  collect  these  dividends  from  that 
some  one  else,  and  should  the  stock  be  in  the  name  of  a 
broker,  the  broker  is  entitled  to  charge  a  commission 
which  is  deducted  from  the  dividends. 

3.  In   case   the   company   issues   rights  or   privileges   which 

have  an  actual  market  value,  the  client  perhaps  fails 
to  receive  the  same  and  thereby  incurs  a  loss. 

4.  Should,  perchance,  the  certificate  of  stock  become  lost,  it 

is  much  easier  to  trace  the  certificate,  stop  transfer,  and 
eventually  recover  it,  than  if  the  certificate  stands  in 
the  name  of  some  one  else.  In  the  latter  case,  permission 
must  be  obtained  and  legal  requirements  met  before 
actual  transfer  can  be  established  and  recovery  made. 

5.  If  a  stock  is  held  in  some  one  else's  name  after  purchase, 

there  is  always  a  possibility  that  the  previous  owner 
may  have  died,  in  which  case  it  might  be  difficult  to 
transfer  it,  especially  if  this  were  known. 


Tra7isfers   and   Deliveries  45'- 

6.  In  case  of  the  death  of  the  owner  of  the  certificate,  it  is- 

much  easier  to  arrange  a  settlement  and  effect  transfer 
to  the  trustees  or  executors  or  to  the  beneficiaries. 

7.  Unless  a  stock  is  transferred,  there  is  a  possibility  that 

the  certificate  may  be  a  forgery,  which  would  not  be 
known  until  it  was  too  late  to  make  recovery. 

8.  For  sanitary  reasons  it  is  advisable  to  transfer  a  certificate, 

for  a  clean,  new  certificate  is  a  better  possession  than 
one  which  has  gone  through  the  hands  of  hundreds  of 
people,  and  which  has  stamped  on  it  powers  of  attorney 
so  thickly  that  it  is  hard  to  decipher  them. 

9.  By  giving  a  name  for  transfer  at  once,  or  to  the  broker  on 

the  same  day  on  which  the  purchase  is  made,  the  cus- 
tomer is  likely  to  save  himself  extra  tax  charge. 

Additional  Suggestions 

Other  suggestions  dealing  with  this  matter  of  transfers  are: 

1.  Become    thoroughly    acquainted    with    the    body    of    the 

certificate  or  what  is  written  on  the  face  of  the  bonds  or 
its  coupons. 

2.  Find  out  at  once  the  customary  date  on  which  the  stock  is 

ex-dividend  and  pays  the  dividend,  or  on  which  date 
the  coupons  are  due  on  the  bonds. 

3.  Collate  every  scrap   of  data  w^hich   is  sent  out  by   the 

company  relating  to  the  stock  or  bond  which  is  held; 
become  acquainted  with  its  import  and  file  it  away  with 
the  certificate. 

4.  Become  thoroughly  acquainted  with  the  purpose  and  the 

value  of  any  rights  or  privileges  of  subscription  when 
they  are  offered  by  the  company.  For  example,  at  the 
present  time  the  General  Electric  Company  once  a  year 
customarily  declares  a  dividend  in  stock.  Is  it  better 
to  retain  these  new  shares  even  though  they  are  in 
scrip  or  is  it  better  to  give  the  company  the  privilege- 
of  selling  these  shares  at  the  market  price  and  remitting, 
to  you  the  balances  due? 


44         Handling   a  Brokerage   Account 

Delay  in  Transfer 

Sometimes  it  so  happens  that,  after  a  customer  has  pur- 
chased his  security  and  given  the  broker  instructions  to  transfer, 
there  is  a  long  delay  before  the  certificate  arrives  with  the  in- 
structions fulfilled.  If  the  delay  is  more  than  two  or  three  days, 
it  is  advisable  to  communicate  at  once  with  the  broker.  The 
reasons  for  possible  delay  may  be 

1.  Carelessness  or  inattention  on  the  part  of  the  broker. 

2.  The  non-delivery  of  the  stock  to  the  broker  by  the  seller. 

3.  The  transfer  books  of  the  company  may  be  closed  for  a 

period  of  time  and  therefore  the  broker  holds  the  stock 
until  such  time  as  the  books  are  opened  for  entering  the 
transfer  and  issuing  the  new  certificate. 

4.  The   broker's   instructions   from   the   client   may   not   be 

clear  as  to  sending  the  certificate  to  the  client. 

5.  In  any  event,  if  you  own  stock  outright  with  your  broker, 

against  which  there  is  no  obligation  on  your  part,  it  is 
your  duty  to  make  certain  that  such  securities  are  not 
held  by  the  broker  in  the  open  accounts  of  his  firm  or 
used  by  him  in  connection  with  other  securities  as 
collateral.  Such  paid-for  securities  should  be  taken 
out  of  the  firm's  general  business  and  placed  in  a 
separate  envelope  marked  as  the  property  of  the  cus- 
tomer who  owns  them,  and  notation  of  such  arrangement 
and  proceedings  should  be  made  upon  the  ledger  account 
of  the  customer. 

Care  in  Signing  Proxies 

The  owner  of  a  stock  certificate  should  never  sign  an  author- 
ization or  a  proxy  permitting  the  directors  or  voting  trustees  or 
any  coterie  of  stockholders  to  act  upon  and  vote  his  shares  unless 
he  is  thoroughly  acquainted  with  the  proceedings  about  to  occur. 

The  signing  of  an  authorization  involving  expenses  may 
result  in  the  owner  of  a  security  becoming  liable  on  a  certain 
■date  for  such  expenditures  which  would  not  be  called  for  until 
after  the  stock  had  been  sold  by  him,  and  so  in  the  possession  of 


Transfers   and   Deliveries  45 

another  person,  yet  he  would  be  called  upon  for  payment  of  his 
former  proportion  of  expenses. 

On  the  other  hand,  should  it  seem  that  the  action  proposed  is 
for  the  best  interests  of  the  stockholder,  he  should  co-operate 
with  those  requesting  his  proxy  by  sending  it  in  as  requested. 

Lost  or  Stolen  Certificates 

A  coupon  bond  payable  to  bearer  or  a  stock  certificate  assigned 
in  blank  is  good  in  the  hands  of  an  innocent  and  bona  fide  holder 
who  acquires  it  by  honest  purchase  at  a  fair  market  price  without 
knowledge  that  it  was  fraudulently  obtained  by  any  previous 
holder  even  though  it  may  have  been  lost  by  or  stolen  from  its 
owner. 

The  recovery  of  a  lost  or  stolen  bond  or  stock  certificate  can 
rarely  be  accomplished  unless  it  is  found  in  the  hands  of  the 
finder  or  of  the  thief  or  his  accomplice  or  some  person  who  has- 
obtained  possession  of  it  by  fraud,  or  under  circumstances  which 
will  convict  him  of  knowledge  or  suspicion  of  fraud  on  the  part 
of  the  one  from  whom  he  received  it. 

The  fact  that  a  lost  or  stolen  bond  or  stock  certificate  has 
been  advertised  by  its  number  does  not  invalidate  the  title  of  an 
innocent  holder,  as  it  cannot  be  held  that  the  purchaser  of  a 
bond  or  a  stock  certificate  is  bound  to  have  knowledge  of  the 
advertisement. 

A  registered  bond  is  without  coupons  (in  most  cases)  and  is 
filled  in  with  the  name  of  the  registered  owner  and  is  payable  to 
him  or  his  assigns.  It  is  not  available  to  any  other  person  until 
properly  assigned  or  transferred  by  the  registered  owner.  If  a 
registered  bond  (as  to  principal  and  interest)  or  a  stock  certifi- 
cate, not  assigned  in  blank,  is  lost  or  stolen  the  owner  can  secure 
a  new  bond  or  certificate  by  furnishing  a  bond  of  indemnity. 

Although  the  requirements  of  different  companies  show  con- 
siderable variations,  yet  the  following  are  the  general  require- 
ments to  secure  a  duplicate  for  a  lost  or  destroyed  certificate: 

1.  A  formal  notice  of  the  loss,  with  request  to  stop  transfer. 

2.  An  affidavit,  signed  by  the  registered  stockholder,  stating 

as  fully  as  possible,  particulars  of  the  loss. 


46         Handling   a  Brokerage   Account 

3.  Notice  of  loss  must  be  sent  to  the  Secretary  of  every 

Exchange  upon  which  the  security  is  traded. 

4.  An  advertisement  of  the  loss  must  be  inserted  in  three  or 

more  issues  of  a  prominent  daily  newspaper,  in  each 
city  where  such  Exchanges  are  located.  Copies  of  such 
newspapers,  advertisements  included,  must  be  filed  with 
the  company. 

5.  A  surety  bond  in  twice  the  par  value  of  the  lost  certificate, 

the  form  of  which  is  to  be  approved  by  the  company, 
must  be  given  by  the  owner  of  the  lost  certificate. 

6.  Where   all   above   requirements   have   been   fulfilled   and 

consent  has  been  received  by  the  company  from  the 
Exchanges  interested,  a  duplicate  certificate  will  usually 
be  issued  after  a  period  of  about  six  months  from  the 
date  of  the  loss. 

Transfer  Tax 

The  subject  of  transfer  taxes  is  one  which  necessitates  a  long 
and  careful  study,  but  for  the  layman  it  is  essential  to  know  only 
the  fundamental  requirements  of  the  State. 

There  are  four  systems  of  taxation  which  affect  the  buyer  or 
seller  of  stocks.  Each  system  is  based  on  the  same  scale  and,  in 
each  case,  a  revenue  stamp  is  used  on  the  sales  ticket.  These 
are:  The  Federal  Tax;  the  New  York  State  Tax;  the  Massa- 
chusetts State  Tax;  and  the  Pennsylvania  State  Tax.  The  State 
Tax  is  based  on  the  par  value  of  the  stock  and  is  determined  at 
the  rate  of  two  cents  a  share  or  fraction  of  a  share,  of  the  par 
value  of  $100.  If  the  stock  is  of  no  par  value,  all  the  state  taxes 
class  no  par  as  though  it  were  $100. 

On  all  sales  or  agreements  to  sell  or  memoranda  of  sales  or 
deliveries  of  stock  or  transfer  or  local  change  of  shares  or  certifi- 
cates of  stock  to  any  other  individual,  it  is  necessary  to  affix 
Federal  revenue  stamps,  and  attach  them  either  to  the  certificate 
itself  or  to  the  memorandum  of  sale,  to  the  amount  of  two  cents 
for  each  $100  of  face  value  or  fraction  thereof.  This  includes 
-Stocks  with  no  par  or  face  value,  and  if  the  actual  value  or  the 


Transfers   and   Deliveries  47 

sale  value  is  in  excess  of  $100  per  share,  there  shall  be  an  addi- 
tional tax  of  two  cents  on  each  $100  of  actual  value  or  fraction 
thereof.  The  broker  takes  care  of  this,  charging  the  same  to  the 
customer's  account. 

The  broker's  client  must  realize,  first  of  all,  certain  facts. 
In  the  first  place  the  state  laws  assume  that  every  transfer  of 
stock  constitutes  a  sale.  This  may  not  be  the  actual  case,  but 
no  affidavit  can  make  the  Government  change  its  mind.  In 
the  second  place,  there  exists  no  broker  who  desires  to  pay  his 
double  tax  and  go  into  detailed  explanations  with  his  customer. 
In  the  third  place,  the  laws  of  the  various  stock  exchanges  pro- 
hibit the  broker  from  assuming  this  extra  charge  unless  the  said 
broker  is  actually  at  fault.  The  above  facts,  therefore,  are 
sufficient  evidence  in  themselves  that  the  broker  has  every  reason 
to  evade  this  extra  charge  if  it  is  possible. 

General  Regulations  Covering  Transfer 

I.     Registration 

1.  In  transferring  stock  or  bonds  to  the  name  of  an  Individual  or  Firm, 
the  full  name  should  be  given  as  it  is  usually  signed  without  prefix,  suffix,  or  title. 

2.  When  a  transfer  is  made  to  the  name  of  a  woman,  the  prefix  Miss  or 
Mrs.  should  be  given,  and  the  security  registered  in  her  individual  name, 
Thus,  Mrs.  Jane  Doe  and  not  Mrs.  John  Doe. 

3.  The  titles  of  Corporations  or  Associations  should  be  stated  in  full, 
including  the  prefix  The  when  applicable. 

4.  The  name  of  a  Trustee  or  Trustees  should  be  followed  by  a  brief  de- 
scription of  the  trust. 

5.  The  name  of  an  Executor  or  Administrator  should  be  followed  by  a 
brief  description  of  the  will  or  estate. 

6.  Transfers  to  the  Estate  of  John  Doe  are  usually  impossible.  Richard 
Roe,  Executor  (or  Administrator)  of  the  Estate  of  John  Doe,  is  preferable. 

7.  Usually  Executors,  Administrators,  or  Trustees,  can  not  transfer  to 
themselves  as  individuals.  If  necessarily  done,  the  reason  and  justification 
therefor  should  be  shown  b}'  a  court  order  or  otherwise.  The  best  way  is  to 
transfer  to  a  third  party  and  retransfer  to  name  desired. 

8.  In  all  cases  the  addresses  of  transferees  should  be  stated  with 
particularity. 

9.  Persons  or  associations  having  securities  transferred  to  themselves 
from  time  to  time  are  requested  to  state  the  name  uniformly,  in  order  to  avoid 
the  opening  of  unnecessary  accounts  and  the  confusion  and  inconvenience 
consequent  thereon. 


48         Handling   a  Brokerage   Account 

If  John  Doe  be  a  registered  holder,  the  name  should  not  be  given  as  Jno. 
Doe  or  J.  Doe  at  the  time  of  subsequent  transfers;  and  the  name  Richard 
Roe  &"  Co.,  should  not  afterwards  be  stated  as  Richard  Roe  &  Company  or 
R.  Roe  &f  Co. 

II.     Assignment 

1.  The  assignment  on  the  reverse  side  of  a  certificate  or  bond,  must  be 
signed,  witnessed  and  dated.  The  name  of  the  person  constituted  as  attorney 
to  make  the  transfer  upon  the  books  of  the  Company,  should  be  omitted. 

2.  Signatures  to  such  assignments  must  be  technically  correct;  that  is, 
they  must  correspond  in  every  particular  with  the  name  in  which  the  security 
is  issued,  without  abbreviation,  enlargement  or  change. 

(a)  The  assignment  of  a  certificate  or  bond  registered  in  the  name  of 

John  Henry  Smith,  must  not  be  executed  in  the  name  of  John  H. 
Smith,  J.  Henry  Smith,  or  J.  H.  Smith.  If,  however,  a  certificate 
in  the  name  of  John  Henry  Smith  has  been  signed  "J.  H.  Smith," 
the  incorrect  signature  should  not  be  erased,  but  the  proper  signa- 
ture "John  Henry  Smith"  should  be  signed  either  directly  above  or 
below  the  incorrect  signature  and  each  should  be  witnessed. 

(b)  Titles,  if  any,  must  be  prefixed  or  sufiixed  to  signatures,  exactly  as 

they  appear  on  the  face  of  the  security.  If  the  prefix  Miss,  Mrs., 
Rev.,  Dr.,  CapL,  Baron,  etc.,  constitutes  a  part  of  the  name  of  the 
holder  as  registered,  the  signature  must  include  such  prefix. 

(c)  Brothers  or  Bros.,  must  be  written  as  it  appears  in  the  security. 

3.  When  a  security  has  been  issued  in  a  name  incorrectly  stated  or  wrongly 
spelled,  the  assignment  must  be  executed  both  in  the  name  as  registered  and 
in  the  correct  name. 

4.  The  assignment  of  a  security  registered  in  the  name  of  John  Doe  and 
Richard  Roe  must  be  executed  by  both. 

5.  The  assignment  of  a  security  registered  in  the  name  of  a  woman  sub- 
sequently changed  by  marriage,  must  be  executed  Jane  Doe,  now  Jane  Roe. 
Evidence  of  the  marriage  and  of  the  holder's  identity,  may  be  required. 

6.  A  detached  assignment  must  contain  provision  for  the  appointment  — 
irrevocable  of  a  person  (the  name  being  left  blank)  as  attorney  to  make  the 
necessary  transfer  upon  the  books  of  the  Company,  and  a  full  description  of 
the  security;  that  is.  Name  of  the  Company,  Issue,  Certificate  or  Bond  Number, 
and  the  Face  Amount. 

(a)  A  separate  assignment  should  accompany  each  certificate  or  bond. 

7.  Any  alteration  in  the  wording  of  an  assignment  or  appointment  of  an 
attorney  should,  whenever  practicable,  be  attested  by  the  signature  of  every 
person  joining  in  the  execution  of  the  assignment  as  the  assignor  or  as  one 
of  the  assignors;  and  must  in  any  event  be  attested  by  that  of  a  person^or 
persons  thereunto  authorized. 


Transfers   and   Deliveries  49 

III.     Assignments  by  Corporations  or  Associations 

1.  When  a  transfer  is  to  be  made  from  the  name  of  a  Corporation  or 
Association,  the  certificate  or  bond  must  (subject  to  paragraph  2  below)  be 
accompanied  by  a  copy  of  a  resolution  of  the  board  of  directors  or  trustees, 
authorizing  its  transfer  and  naming  the  ofificer  delegated  to  execute  the 
assignment. 

(a)   This  copy  must  be  certified  by  the  secretary  of  the  Corporation  as  a 

true  copy  from  the  minutes. 
(&     If  such  a  resolution  is  of  a  continuing  effect,  the  secretary  of  the 

Corporation  must  certify  that  the  resolution  is  in  effect  at  the  time 

of  the  intended  transfer. 

2.  If  a  transfer  is  to  be  made  on  the  authority  of  a  by-law,  the  security 
must' be  accompanied  by  a  copy  of  the  by-law,  certified  by  the  secretary  of 
the  Corporation  as  being  in  effect  at  the  time  of  such  intended  transfer. 

3.  The  corporate  seal  (if  the  Corporation  or  Association  have  one)  must 
be  impressed  upon  the  assignment,  whether  on  the  security  itself  or  detached, 
and  likewise  upon  all  attestations. 

(a)  If  a  Corporation  or  Association  have  no  seal,  attestations  must  be 
acknowledged  before  a  Notary  Public. 

IV.     Assignments  by  Trustees 

1.  When  a  certificate  or  bond  is  to  be  transferred  from  the  name  of  a 
Trustee  or  Trustees,  a  certified  copy  of  the  instrument  creating  the  trust 
must  be  submitted. 

2.  Evidence  is  required  of  the  appointment  of  a  Trustee  or  Trustees,  (if 
other  than  as  stated  in  the  creating  instrument) ;  of  his  or  their  acceptance  of 
the  trust,  and  retention  of  it  at  the  time  of  the  intended  transfer. 

3.  Assignments  by  trustees  require  the  signature  of  all  living  Trustees. 
The  signature  of  one  alone  is  not  sufficient  to  justify  a  transfer  of  .stock  or 
bonds.     (See  Section  V,  paragraph  4.) 

(a)  The  decease  of  a  former  co-trustee  should  be  proved  by  a  certificate 
of  death  when  obtainable,  or  otherwise  by  credible  affidavit,  as  a 
condition  precedent  to  transfer. 

V.     Assignments  by  Executors  and  Administrators 

1.  A  certificate  or  bond  offered  for  transfer  from  the  estate  of  decedent 
intestate,  must  be  accompanied  by  a  certificate  of  the  granting  of  Letters  of 
Administration,  and  evidence  of  the  retention  of  the  trust  by  the  Adminis- 
trator or  Administrators  at  the  time  of  the  intended  transfer. 

2.  A  security  offered  for  transfer  from  the  estate  of  a  decedent  testate, 
must  be  accompanied  by  the  following:  — 

(a)  A  certified  copy  of  the  Last  Will  and  Testament  of  the  deceased. 


50         Handling   a  Brokerage   A  c  c  o  ujtt 

(b)  A  certificate  of  the  appointment  of  an  Executor  or  Executors,  and 
evidence  of  his  or  their  retention  of  the  trust  at  the  time  of  the 
intended  transfer. 

3.  Presumptively,  it  is  within  the  power  of  executors,  or  either  of  several 
executors  alone,  to  sell  and  transfer  the  assets  of  a  decedent.  A  will  may, 
however,  require  joint  action  of  all  the  executors. 

4.  If  an  assignment  is  proposed  by  executors  more  than  eighteen  months 
after  the  decedent's  decease,  a  presumption  arises  that  the  executors  have 
become  Trustees  and  must  be  so  treated. 

5.  Evidence  must  be  furnished  of  the  payment  of  any  inheritance  or 
succession  tax  imposed  by  the  laws  of  the  States  interested,  or  in  lieu  thereof, 
a  waiver  of  notice  issued  by  the  Comptroller,  Auditor,  or  other  proper  office  of 
such  States. 

(a)  If  the  decedent  was  not  a  resident  of  the  State  of  New  York,  and 
died  subsequently  to  July  21,  1911,  a  waiver  by  the  Comptroller 
of  that  State  will  issue  of  right,  upon  application  therefor  with  a 
proper  presentment  of  the  facts. 

VI.     Charges  for  Registration  and  Transfer 

1.  When  a  certificate  of  stock  is  surrendered  and  a  greater  number  of 
certificates  is  issued  in  the  same  name,  or  in  any  one  name,  for  a  like  aggregate 
number  of  shares,  a  charge  of  25  cents  each. is  usually  made  for  the  additional 
certificates.     There  is  usually  no  other  charge  for  the  transfer  of  stock. 

2.  No  charge  is  made  for  the  registration  of  bonds,  nor  for  the  transfer 
of  registered  bonds.  A  charge  of  $1.00  per  bond  is  generally  made  to  cover 
the  actual  cost  of  restoring  registered  bonds  to  coupon  form,  when  such  res- 
toration is  provided  for  by  the  mortgage  securing  such  bonds. 

VII.     Taxes  on  Registration  and  Transfer 

1.  The  State  and  Federal  transfer  tax  on  stock  of  any  Company  trans- 
ferred within  the  States  of  New  York,  Massachusetts,  and  Pennsylvania, 
amounts  in  each  case  to  2  cents  per  $100  of  par  value  or  fraction  thereof. 
The  duty  to  require  payment  in  advance  of  making  a  transfer,  is  imposed 
upon  the  Companies  by  law. 

2.  There  is  now  no  tax  on  the  registration  or  transfer  of  bonds.  (See 
Section  V,  paragraph  5,  as  to  inheritance  taxes  on  decedents'  estates.) 

VIII.     Transfers  in  Error 

1.  In  case  a  name  has  been  filled  in  for  transfer  in  error,  some  companies 
will  allow  the  name  to  be  erased  if  the  erasure  is  guaranteed  by  a  Stock 
Exchange  member  of  firm,  and  will  correct  if  guaranteed  against  loss  by  a 
Stock  Exchange  member  or  firm.  Other  companies  furnish  forms  of  their 
own  to  be  filled  out,  while  the  Penna.  R.  R.  Co.,  and  a  few  others  require  a 
detached  power  of  attorney,  signed  by  the  original  stockholder  before  making 
correction. 


CHAPTER   VIII 

LEGAL    RELATIONS    BETWEEN    BROKER  AND 
CUSTOMER 

What  the  Legal  Relations  Are 

Inasmuch  as  the  broker  is  an  agent,  and  essentially  an  agents 
the  Law  of  Agency  applies  in  the  relations  between  him  and  his 
customer  in  the  execution  of  orders  for  purchase  and  sale. 
When  the  broker  assumes  the  responsibility  of  taking  an  account 
on  margin,  however,  he  leaves  his  position  as  agent  and  assumes 
a  new  function.  He  becomes  really  a  principal  in  the  transac- 
tion because  he  advances  part  of  the  money  for  the  purchase  of 
the  securities  and  agrees  to  hold  and  carry  the  stocks.  He 
therefore  assumes  a  contract  of  which  he  is  one  of  the  principals^ 
and  the  customer  the  other. 

What  the  Broker  Undertakes  to  Do 

Summing  the  matter  up  in  a  general  way,  the  broker  under- 
takes 

—  To  buy  or  sell  for  the  customer  such  stocks  as  a  customer 
indicates. 

—  To  advance  all  the  necessary  money  upon  a  certain  agreed- 
upon  margin  for  the  financing  of  the  transaction,  which  margin 
is  furnished  by  the  customer. 

— ■  To  carry  or  hold  these  securities  for  the  sole  benefit  of  the 
customer,  so  long  as  the  customer  maintains  and  keeps  good 
the  agreed-upon  margin,  until  such  notice  is  given  by  either  one 
of  the  parties  that  the  transaction  must  be  ended. 

—  Any  appreciation  in  the  value  of  the  securities  accrues  to 
the  profit  of  the  customer,  and  not  to  the  broker,  and  any  depre- 
ciation is  to  the  disadvantage  of  the  customer  and  not  to  the 
broker. 


-52         II a  11  d I i  11  g   a   Brokerage   Account 

—  To  have  under  his  control  at  all  times  and  ready  for 
•delivery  within  a  reasonable  period,  the  securities  which  he  has 

purchased,  or  an  equal  amount  of  the  same  number  of  shares  or 
bonds  of  the  same  stock  or  same  loan. 

—  The  broker  agrees  to  deliver  to  the  customer  when  re- 
quired by  the  customer  and  upon  said  customer's  receipt,  that 
which  he  has  purchased  when  the  balance  is  paid  in  full,  including 
■commissions  and  interest. 

—  The  broker  agrees  to  pay  to  the  customer  the  net  proceeds 
accruing  from  the  sale  of  any  securities  which  have  been  delivered 
to  him  for  sale,  less  his  commission  and  less  the  required  taxa- 
tion which  must  be  paid  for  the  customer. 

What  the  Customer  Undertakes  to  Do 

The  customer,  on  his  part,  undertakes 

- — To  maintain  at  all  times  a  certain  percentage  of  margin, 
based  on  the  current  market  value  of  the  shares  or  bonds. 

—  To  maintain  such  margin  according  to  the  fluctuations  of 
the  market. 

— •  To  take  up  these  shares  which  he  may  have  purchased  or 
to  buy  in  the  shares  which  he  may  have  sold  short,  when  required 
by  the  broker;  and  to  pay  the  difference  between  the  amount 
advanced  by  the  broker  and  himself. 

Laws  Bearing  Upon  Margin  Calls 

The  laws  relating  to  margin  calls  are  based  upon  specific 
•cases  which  have  been  decided  in  the  Courts.  While  it  is  im- 
possible here  to  enter  deeply  into  the  legal  side  of  marginal 
transactions,  the  essential  point  is  that  if  the  broker  has  not  used 
due  diligence  in  the  protection  of  his  clients'  interests,  the  client 
may  recover  any  losses  resulting  from  this  lack  of  due  diligence. 

It  is  the  custom  of  the  Courts  to  look  upon  the  customer's 
side  with  greater  leniency  than  they  do  the  broker's  side;  and 
the  latter's  risk  in  consequence  of  these  many  court  decisions 
has  been  considerably  increased. 

It  is  necessary  for  the  broker  in  sending  out  a  margin  call  to 
make  specific  statements.     If  the  broker  simply  writes,  "Unless 


Relations   ofBroker   and   Customer    53- 

you  put  up  more  money,  we  will  sell  out  your  account,"  it  does 
not  bind,  and  if  he  does  sell  out  the  account,  he  very  likely 
becomes  liable  for  damages  on  the  part  of  the  client.  But  if  the 
broker  writes  to  his  client:  "The  margin  which  you  agreed  to 
maintain  in  your  account  is  rapidly  deteriorating,  and  is  now 
below  that  which  was  agreed  upon.  Unless  you  place  $2,000, 
or  the  equivalent  in  securities  to  the  credit  of  your  account  with 
us,  by  11.30  a.m.,  on  Tuesday,  February  20th,  1920,  the  account 
will  be  closed  out  on  the  New  York  Exchange,  under  the  agree- 
ment which  we  have  previously  entered  into,"  the  notification 
has  binding  effect. 

In  this  case  the  broker  will  likely  protect  himself,  but  if  he 
does  not  close  out  the  account  at  the  time  he  stated,  assuming 
that  the  client  did  not  place  the  required  margin,  he  is  in  the 
same  predicament  as  before;  and  the  client  will  probably  have 
the  law  on  his  side  unless  the  broker  brings  forth  another  definite 
notification  and  acts  upon  it. 

Special  Agreements  Entered  Into 

Under  the  laws  of  New  York,  it  is  prohibited  for  the  broker 
to  close  out  an  account  unless  at  a  public  market;  and  the 
Exchanges  are  not  public  markets.  Therefore,  the  client  usually 
signs  an  agreement  with  the  broker  at  the  time  the  account  is 
opened,  permitting  the  latter  to  liquidate  the  account,  under 
certain  circumstances,  on  the  Exchange  of  which  he  is  a  member. 

Brokers  very  often  go  the  extent  of  imprinting  the  follow- 
ing memorandum  on  their  notices  which,  if  accepted  by  the 
client  without  definite  statement  to  that  effect  but  simply  by 
acquiescence,  is  considered  to  be  a  contract:  "It  is  understood 
and  agreed  that  all  securities  carried  in  this  account  or  deposited 
to  secure  the  same,  may  be  carried  in  our  general  loans  and  may 
be  sold  or  bought  at  public  or  private  sale,  without  notice,  when 
such  sale  or  purchase  is  deemed  necessary  by  us,  for  our  pro- 
tection." 

The  term  used  "without  notice"  is  more  or  less  meaningless 
because  the  law  holds  that  a  contract  of  this  nature  cannot  be 
entered  into  by  acquiescence  and  that  due  notice  must  be  given. 


54         Handling   a  Brokerage   A  c  c  o  it  n  t 

Miscellaneous  Points 

The  broker  is  not  obliged  to  return  to  the  customer  the 
same  certificates  which  were  deposited  with  the  broker  to  be 
used  as  collateral.  A  certificate  of  the  same  number  of  shares, 
although  printed  upon  different  paper  and  bearing  a  different 
number,  represents  precisely  the  same  kind  and  value  of  property 
as  does  another  certificate  for  a  like  number  of  shares  of  stock 
in  the  same  corporation.  It  would  be  a  misconception  of  the 
nature  of  a  certificate  to  claim  that  the  return  of  a  different 
certificate  or  the  right  to  substitute  one  certificate  for  another 
constitutes  a  material  change  in  the  property  right  held  by  the 
broker  for  the  customer. 

In  the  matter  of  executing  an  order  a  broker  is  bound  to 
follow  the  instructions  of  his  principal  or  give  notice  that  he 
declines  the  agency.  A  broker,  therefore,  may  refuse  to  execute 
an  order  for  a  client. 

It  is  well  known  that  an  insolvent  broker  commits  a  crime  in 
accepting  the  account  of  a  client  when  the  broker  knows  that  he 
is  insolvent. 

The  dividends  on  securities  belong  to  the  customer  and  the 
customer  has  the  right  to  withdraw  these  dividends  and  any 
other  am.ounts  from  his  account  in  excess  over  the  margin  which 
he  has  agreed  to  retain  with  his  broker. 


CHAPTER   IX 

SELECTION   OF  A   BROKER 

Characteristics  of  Brokerage  Firms 

There  are  certain  general  qualifications  concerning  a  bro- 
kerage firm  which  should  receive  attention  when  good  brokerage 
service  is  being  sought,  although  strict  rules  cannot  be  laid 
down  with  respect  to  the  individual  requirements  of  the  brokers. 
These  qualifications  may  be  dispensed  with  under  certain  cir- 
cumstances, especially  when  the  customer  has  close  personal  or 
social  relations  with  the  members  of  the  firm  or  the  customer's 
man. 

There  are  certain  firms  which  do  not  desire  to  accept  small 
accounts.  These  are  usually  the  firms  which  have  a  considerable 
capital  and  which  cater  to  men  of  means  and  speculators  who 
deal  heavily  in  securities.  The  multiplicity  of  brokerage  firms, 
during  a  dull  period,  sometimes  brings  about  a  change  whereby 
such  large  firms  are  often  glad  to  accept  these  smaller  accounts, 
but  when  active  times  again  come,  and  the  large  orders  commence 
pouring  in,  little  attention  is  paid  to  the  smaller  accounts,  and 
the  service  which  their  customers  get  is  not  satisfactory. 

Consequently,  for  the  man  who  has  a  small  amount  with 
which  to  speculate,  or  whose  investments  are  in  a  few  bonds  and 
infrequently  in  a  small  number  of  shares,  it  is  oftentimes  better 
to  deal  with  the  firm  which  does  not  have  extensive  ramification, 
and  a  tremendous  machinery.  The  smaller' firm,  realizing  that 
its  business  depends  upon  the  efficiency  of  its  individual  services 
caters  to  the  small  investor  or  speculator  in  the  hope  that  he 
may  develop  later  into  a  larger  one  and  that  his  appreciation 
and  gratitude  for  the  service  rendered  when  he  was  only  a 
small  personage  will  bring  to  the  firm  important  commissions 
when  he  has  grown  financially. 

The  customer  who  deals  in  one  hundred  shares  or  more 
usually  gets  good  service  or  can  insist  upon  good  service  with 


56         Handling   a   Brokerage   Account 

any  brokerage  firm,  but  the  odd-lot  customer  sometimes  suffers 
through  lack  of  attention.  The  odd-lot  business  constitutes  a 
portion  of  the  brokerage  business  which  stands  almost  by  itself, 
and  there  is  a  separate  system  of  machinery  to  take  care  of  it. 
Therefore,  it  is  oftentimes  much  more  profitable  for  the  odd-lot 
investor  or  speculator  to  stick  closely  with  the  firm  which  caters 
to  his  type  of  business. 

It  is  often  desirable,  furthermore,  for  a  speculator  or  investor 
to  attach  himself  to  a  firm  which  has  the  reputation  for  excellent 
judgment  in  making  selections  for  its  clients  and  in  giving  good 
advice.  The  larger  firm  with  its  tentacles  stretched  out  over 
the  financial  district  is  able  to  absorb  much  more  news  and  to 
grind  this  news  down  into  a  workable  mass  and  utilize  it  for  the 
benefit  of  the  customer. 


Individual  or  Professional  Standing 

The  choosing  of  the  broker  or  the  brokerage  firm  should  be 
entered  into  with  care.  The  position  and  standing  of  a  brokerage 
firm  is  not  similar  to  that  of  a  mercantile  firm  and  cannot  be 
judged  in  the  same  way.  This  business  partakes  more  of  the 
speculative  and  does  not  depend  so  largely  upon  the  usual 
business  assets.  It  is  not  so  necessary,  accordingly,  to  know  the 
amount  of  capital  and  the  financial  resources  of  a  brokerage  firm 
as  it  is  to  know  the  character  of  the  individual  members  of  the 
firm  and  the  reputation  which  the  firm  holds  among  other 
brokerage  houses  and  among  bankers.  In  plain  words,  a  rating 
in  Bradstreet's  or  Dun's  has  little  to  do  with  the  selecting  of  a 
brokerage  firm  with*  which  to  do  business. 

The  reason  for  this  is  that  a  brokerage  firm  with  a  tremendous 
amount  of  capital  can  be,  and  usually  is,  very  much  extended, 
especially  during  a  rising  market,  in  the  matter  of  its  loans. 
Some  of  the  large  speculative  firms  during  a  bull  market  have 
been  known  to  borrow  from  $40,000,000  to  $80,000,000  to  take 
care  of  their  regular  accounts.  If  a  crisis  should  come  such  as 
occurred  at  the  outbreak  of  the  war  in  Europe,  and  if  no  pro- 
tection could  be  afforded  such  as  was  afforded  during  that  period, 


Selectio7iofaBroker  57 

the  firm  which  was  very  much  extended  in  the  matter  of  its 
loans  would  go  to  the  wall  in  an  instant,  while  the  small  firm 
with  a  limited  capital,  doing  a  business  possibly  in  the  same 
proportion  to  its  capital  as  the  big  firm,  would  likely  be  able  to 
weather  the  storm  because  its  necessities  could  be  taken  care 
of  by  its  banking  connections  without  much  trouble  or  much 
extension  of  credit  by  the  banking  association. 


Lax  Methods  a  Danger  Signal 

Any  firm  which  will  involuntarily  bring  to  the  attention  of 
its  clients  lax  methods  in  relation  to  the  ethics  of  the  business, 
such  as  suggesting  a  low  rate  of  interest  for  the  purpose  of 
acquiring  the  account  or  indirectly  or  directly  splitting  com- 
missions, is  a  dangerous  one  with  which  to  deal.  Furthermore, 
if  the  firm  shows  carelessness  in  its  Service  Department  and  if 
it  extends  to  its  customers  "tips"  without  the  backing  of  a  reason 
for  such  tips,  it  is  almost  an  insurance  to  stay  away  from  it. 

While  the  membership  on  the  Exchange  safeguards  the  client, 
it  does  not  necessarily  follow  that  because  a  firm  is  a  member  of 
a  Stock  Exchange  that  it  is  better  than  a  brokerage  firm  which  is 
not  a  member  of  a  Stock  Exchange,  because  the  brokerage  firm 
which  is  not  a  member  of  a  Stock  Exchange  may  deal  substan- 
tially in  unlisted  securities  and  make  its  profit  from  this  source. 
But  the  firm  which  is  not  a  member  of  the  Exchange,  whose 
business  is  in  securities  which  are  listed  on  the  Exchange,  deserves 
careful  watching,  because  it  cannot  purchase  and  sell  stocks 
without  paying  the  full  commission  of  an  outsider  and  as  its 
profits  must  come  from  some  sources,  it  may  be  they  are  derived 
from  one  which  is  not  likely  to  be  beneficial  to  the  customer. 

Any  firm  which  permits  a  margin  account  to  fall  below  the 
requirements,  which  are  given  to  the  client  when  the  account  is 
established,  is  dangerous.  Though  at  first  thought  it  might  seem 
otherwise,  one  should  favor  the  firm  which  enforces  strictly  its 
margin  requirements. 


CHAPTER   X 
THE   CUSTOMER'S   CO-OPERATION 

Essentials  of  Co-operation 

The  effective  co-operation  which  ought  to  exist  between 
broker  and  customer  (assuming  that  the  latter  has  chosen  his 
broker  wisely)  rests  upon  rather  simple  principles,  a  willingness 
to  see  both  sides  and  the  desire  to  render  one's  business  dealings 
mutually  profitable. 

It  may  be  well  in  conclusion  to  say  a  few  words  upon  these 
points: 

Complaints 

There  are  many  reasons  for  complaining  on  the  part  of 
customers  in  connection  with  their  brokerage  firms,  but  the  chief 
ones  are  the  matter  of  interest  rate,  the  execution  of  an  order, 
the  maintaining  of  margins,  the  delay  in  delivery  of  securities, 
the  time  it  takes  to  report  a  transaction,  and  the  method  of 
making  out  statements  and  reports. 

If  the  customer  thoroughly  acquaints  himself  with  the 
business  of  brokerage,  there  will  be  no  need  for  complaints, 
because  when  the  fault  lies  with  the  broker,  it  will  either  be 
apparent  or  it  will  be  a  misunderstanding  which,  if  called  to  the 
broker's  attention  in  a  pleasant  and  respectful  manner,  will  be 
adjusted  by  the  broker. 

It  is  never  advisable  for  the  customer  to  become  angry  or 
"lose  his  head"  over  a  misunderstanding  in  connection  with  a 
brokerage  transaction.  He  should  at  once  apply  to  the  proper 
personage  in  the  firm,  and  if  the  explanation  is  not  satisfactory, 
he  has  an  opportunity  to  go  directly  to  the  Secretary  of  the 
Exchange  of  which  the  brokerage  firm  is  a  member.  If  the 
brokerage  firm  is  not  a  member  of  any  Exchange,  it  is  his  place 
to  take  the  matter  up  at  once  with  the  District  Attorney. 

No  brokerage  firm  or  their  employees  or  agents  should  accept 
a  discretionary  account  from  its  client,  and  if  they  do  accept  a 


The   Customer's   Co-operation  59- 

discretionary  account,  it  means  that  they  are  bringing  disaster 
upon  themselves.  And  disaster  means  trouble  for  every  one  of 
the  clients. 

The  Business 

Commissions  in  relation  to  the  service  performed  are  so  low 
that  few,  if  any,  brokers  in  the  history  of  the  profession  have 
gained  wealth  through  the  accepting  of  commissions,  and  the 
carrying  of  margin  accounts  alone.  In  fact,  it  is  almost  axio- 
matic that,  the  business  being  so  underpaid,  the  broker,  to  make 
large  profits,  finds  it  necessary  to  combine  the  brokerage  business 
with  investment  banking  or  with  speculation  on  his  own  account. 
Therefore,  with  this  understanding  in  mind,  viz.,  that  the  service 
which  he  secures  costs  him  a  most  reasonable  price,  it  is  the  duty 
of  the  customer  to  co-operate  with  the  broker  and  the  broker's 
clerks  as  much  as  lies  within  his  power. 

The  business,  moreover,  has  its  lean  years  during  which  sa 
little  trade  is  done  that  it  is  necessary  for  brokers  to  examine  their 
payrolls  to  see  where  they  can  lighten  their  expenses.  Then 
follows  a  time  of  wild  activity  in  which  the  public  engages  in 
abnormal  speculation,  the  machinery  is  clogged,  the  clerks  are 
over-worked,  and  it  is  difficult  for  the  broker  to  maintain  an 
efficient  organization.  All  these  factors  must  be  borne  in  mind 
by  the  customer. 

Market  Letters 

The  reasonable  attitude  toward  what  the  broker  attempts  tO' 
do  for  customers,  is  especially  essential  with  reference  to  the 
giving  of  advice  - — •  market  commitments.  The  broker  does  not 
like  to  give  advice ;  but  custom  and  competition  in  the  profession 
have  made  it  necessary  for  him  to  give  this  advice,  and  to 
maintain,  as  previously  explained,  very  often  a  large  and  costly 
service  department. 

Much  of  this  advice  is  of  general  character  and  disseminated 
through  the  medium  of  market  letters.  A  general  market  letter  is 
the  composite  opinion  of  the  firm,  based  upon  conditions  of  an, 


-60         H a?idlin g   a  Brokerage   Account 

economic  nature  which  exist;  and  these  opinions  are  usually 
such  as  to  cover  a  period  of  time,  since  brokers  cannot  assume 
the  responsibility  of  definitely  announcing  the  course  of  prices 
for  the  day  or  even  the  next  two  or  three  days.  This  general 
letter,  too,  often  contains  analyses  of  individual  securities,  which 
might  be  good  speculative  opportunities  for  one  type  of  client 
and  disastrous  for  another. 

Inasmuch  as  this  is  recognized,  it  is  coming  to  be  the  custom 
for  the  brokerage  fraternity  to  make  market  letters  rather  general 
in  character;  but  to  deal  personally  and  individually  with  their 
customers,  advising  them  in  accordance  with  their  characteristics, 
their  wealth,  their  desires,  and  the  end  in  view. 

Brokerage  Advertising 

In  the  past  the  brokerage  profession  has  been  quite  similar  to 
that  of  the  physician  or  the  lawyer  in  the  matter  of  advertising, 
and  it  has  been  deemed  a  breach  of  good  business  to  do  more 
than  to  make  a  small  announcement,  consisting  of  the  name  of 
the  firm,  the  nature  of  the  business,  the  telephone  number,  and 
the  address.  The  development  of  advertising  and  the  fact  that 
it  is  becoming  aristocratic  has  placed  a  somewhat  different 
aspect  on  the  viewpoint  of  brokerage  advertising  and  it  is  now 
considered  to  be  ethical  and  proper  for  the  broker  to  advertise 
his  service  and  to  explain  why  his  service  is  as  good,  if  not  better, 
than  that  of  his  competitor. 

Conclusion 

Just  as  the  careful  study  of  investment  and  speculation 
increases  the  customer's  ability  to  derive  profit  from  his  invest- 
ment and  speculation,  so  will  knowledge  of  how  things  actually 
run  in  a  brokerage  establishment  enable  him  with  increased 
success  to  choose  his  broker  and  deal  satisfactorily  with  him. 

We  trust  that  what  has  been  said  in  the  preceding  pages  will 
prove  useful  to  subscribers  in  securing  these  much-to-be-desired 
results. 


TEST   QUESTIONS 

"HANDLING   A    BROKERAGE   ACCOUNT" 

The  Test  Questions  which  are  unstarred  can  be  answered 
directly  from  the  Text  discussion.  You  will  find  them  helpful 
for  purposes  of  review. 

The  questions  which  are  starred  call  for  original  thought, 
the  ability  to  apply  the  knowledge  gained  from  the  Text  to  the 
solution  of  new  problems. 

Answers  to  these  starred  questions  are  to  be  found  on  the  last 
page  of  this  Text. 

*1.  "What  is  the  price  at  present  of  Fisher  Body  Com- 
mon ?  I  hold  this  security  but  haven't  seen  it  for  some  time 
in  the  column  of  daily  transactions.  Where  can  I  get  this 
information?" 

2.  Explain  how  orders  are  handled  (see  also  "Developing 
Financial  Skill,"  pp.  50-53). 

3.  The  broker's  practice  of  using  his  customers'  securities 
as  collateral  for  loans,  has  at  times  been  severely  criticised^ 
Why  does  he  do  this? 

4.  What  are  the  two  chief  sources  of  a  broker's  earnings? 
*5.   "I  bought  100  shares  of  Submarine  Boat  on  December 

15th,  through  B —  &  K — ,  and  the  following  day  sent  certified 
check  to  them  for  the  balance  due,  with  instructions  to  have 
the  certificate  transferred  to  my  name.  To  date  (February  18) 
I  have  not  received  the  certificate,  nor  have  I  had  answers  to  my 
last  two  letters.     What  ought  I  to  do? 

*6.  "D — ,  F — ,  &  Co.,  Curb  brokers,  with  whom  I  had  an 
account  have  just  failed.  Since  from  time  to  time  I  purchase 
Curb  securities,  can  you  recommend  me  a  Curb  broker  who 
'won't  fail'?" 

7.  What  constitutes  adequate  notification  by  the  broker  that 
more  margin  is  needed? 

*8.  Were  you  a  broker  would  you  advise  customers  with 
respect  to  their  various  commitments?  Would  you  accept  an 
order  of  this  type?  "Close  out  my  100  shares  of  Steel  while  I 
am  away  next  week  if  you  think  the  market  will  go  lower?" 

9.  Why,  specifically,  should  a  customer  know  how  the 
brokerage  business  is  conducted? 


Mr.  X.  Y.  Z. 


KEY  PRO 

o 

HANDLING  YOUR  BR 

In  Accou 


Date 


Debit 
Received 


Amount 


Days 


Interest 


Jan. 

Jan. 

Jan. 

Jan. 

Jan. 

Jan. 

Jan. 

Jan. 

Jan. 

Jan. 

4 

Jan. 

4 

Jan. 

12 

Jan. 

13 

Jan. 

13 

Jan. 

27 

Jan. 

29 

Jan. 

30 

Jan. 

30 

Jan. 

31 

Balance 

50  Rdg.  (85) 

100  Nickel  (14) 

100  St.  L.  S.  W.  (27) 

50  Rubber  (66)    

50  Utah  (46)    

50  Un.  Pac.  (116)..  . 
50  M.  N.  P.  (156)  .. 
50  A.  L.  O.  (84)  .  .  . 
10  B.  Ed.  7's    

(subscription)  .... 

Check    

10  N.  West  Tel 

7's  (subscription)  . 
100  Steel®  813^  ..  . 

50  Utah  SOy^   

Cash    

Check    

50  Rubber  643^  .... 


Int.  9% 


Balance? 


$16,283.40 


9,725.00 
1 ,000.00 


9,656.12 
8,127.50 
2,532.50 
35.00 
750.00 
3.232.50 


Feb.    1 
Feb.    1 


Balance? 

Stocks  on  Hand 


We  have  found  that  not  five  (5)  out  of  every  one  hundred  (100)  men 
know  how  to  thoroughly  check  up  their  brokerage  account.  The  above 
statement  for  January  is  for  a  month  of  thirty-one  (31)  days.  Interest 
is  9%.     Figure  balance,  whether  a  debit  or  credit.     Bring  down  stocks  on 


BLEM 

N 

OKERAGE  ACCOUNT 

nt  with  A.  A.  ADAMS  &  CO. 


Credit 
Delivered 


Amount      Days   Interest 


Jan.  10 
Jan. 11 
Jan. 14 
Jan.  15 
Jan. 15 
Jan.  16 
Jan.  16 
Jan.  18 
Jan.  18 
Jan.  20 
Jan.  25 
Jan.  26 
Jan.  28 
Jan.  30 


100  Nickel  16i< 
50  Rubber  70^ 

100  Steel  @  84i<£ 
50  Un.  Pac.  121 

div.  50  U.  P 

10  N.  West  Tel. 

7's97 

10  B.  Ed.  7's    ..  , 
delivered 

100  Steel  @  86H 
50  M.  N.  P.  162 
50  A.  L.  O.  88H. 
50  M.  N.  P.  164 
50  Rdg.  33}/^...  . 


Balance 


$1,606.00 

3,515.50 

8,406.00 

6,040.50 

125.00 


9,688.15 


9,700.00 
8,631.00 
8,090.50 
4,415.50 
8,190.50 
4.165.50 


Feb.    1 
Feb.    1 


Balance? 


hand  February  1.     Figure  your  equity  (or  money  on  hand)  based  on  prices 
given  in  parenthesis  (  ).     Price  for  Steel  is  eighty-two  (82). 

Figure  this  statement,  and  prove  it,    as  shown  by   text.     When  worked 
out,  problem  may  be  copied  and  sent  in  for  correction  if  desired. 


ANSWERS  TO  STARRED  QUESTIONS 
"HANDLING  A  BROKERAGE  ACCOUNT" 

*1.  The  price  quoted  (at  time  inquiry  was  received)  was  172  bid  and  195 
asked.  This  stock  thus  shows  a  very  wide  spread  in  its  quotations.  For 
this  reason  it  is  not  advisable  to  enter  orders  either  to  buy  or  sell  without 
first  having  a  quotation. 

Your  broker  can  obtain  a  quotation  for  you  upon  request.  But  we 
suggest  that  you  make  use  of  the  column  of  closing  bid  and  asked  prices  in 
keeping  track  of  the  market  for  these  inactive  issues.  Some  papers,  such  as 
the  Ne:v  York  Times,  list  sepa.rately  these  bids  and  asked  prices  of  issues  in 
which  no  transactions  have  occurred. 

*5.  There  are  certain  justifiable  causes  for  delay  in  transfer  (see  Text, 
Page  47)  but  should  you  have  put  the  matter  up  to  the  firm  clearly,  as  you 
appear  to  have  done,  they  have  been  very  negligent,  to  say  the  least.  We 
suggest  that  you  send  them,  by  registered  mail,  letter  notifying  them  that 
this  certificate  must  reach  you  by  a  certain  definite  time,  say  one  week,  or 
you  will  put  the  matter  into  the  hands  of  the  District  Attorney. 

*6.  You  can  purchase  Curb  securities  through  a  New  York  Stock  Exchange 
firm.  Many  of  these  firms  have  a  Curb  representative  and  can  give  you  fully 
as  satisfactory  service  as  the  average  Curb  house.  While  the  term  "won't 
fail"  cannot  be  applied  with  positiveness,  these  members  of  the  New  York 
Stock  Exchange  possess  considerable  financial  solidity. 

*8.  We  shall  leave  the  first  part  of  this  question  for  the  reader  to  decide 
for  himself,  pro  and  con.  See  in  this  connection  what  Mr.  Holt  says  on 
Page  28  of  "Market  Information."  Looking  at  the  matter  practically, 
brokers,  in  order  to  meet  the  demands  laid  upon  them,  do  go  a  long  way  in 
giving  advice. 

This  represents  a  discretionary  order;  and  brokers  of  repute  will  not  — 
save  under  very  unusual  conditions,  such  as  a  special  favor  for  some  customer 
whose  views  upon  the  market  and  methods  of  trading  are  well  known  to  the 
broker  —  accept  them.  The  acceptance  of  these  discretionary  orders  opens 
the  way  to  so  many  disputes  and  difficulties  that  conservative  practice  is 
decidedly  against  it. 


Garden  City  Press,  Inc. 

Newton,  Mass. 


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